Business Finance TG.pdf

The Commission on Higher Education

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SPECIALIZED SUBJECT

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BUSINESS FINANCE

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Teaching Guide for Senior High School

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in collaboration with the Philippine Normal University

This Teaching Guide was collaboratively developed and reviewed by educators from public and private schools, colleges, and universities. We encourage teachers and other education stakeholders to email their feedback, comments, and recommendations to the Commission on Higher Education, K to 12 Transition Program Management Unit - Senior High School Support Team at [email protected]. We value your feedback and recommendations.

This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Development Team Team Leader: Arthur S. Cayanan, Ph.D. Writers: Jerelleen A. Rodriguez, Al-Habbyel B. Yusoph, Rachelleen A. Rodriguez, Diogenes C. Dy

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Technical Editors: Pamela Anne S. Lloren, Ma. Andrea Antonino-Balce Copyreader: Patricia Carmela I. Lumanlan Illustrator: Patricia G. De Vera

Commission on Higher Education  K to 12 Transition Program Management Unit  Office Address: 4th Floor, Commission on Higher Education, C.P. Garcia Ave., Diliman, Quezon City  Telefax: (02) 441-0927 / E-mail Address: [email protected]

Senior High School Support Team 

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Published by the Commission on Higher Education, 2016  Chairperson: Patricia B. Licuanan, Ph.D.

CHED K to 12 Transition Program Management Unit Program Director: Karol Mark R. Yee

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Lead for Senior High School Support:  Gerson M. Abesamis

Consultants

THIS PROJECT WAS DEVELOPED WITH THE PHILIPPINE NORMAL UNIVERSITY. 

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University President: Ester B. Ogena, Ph.D.  VP for Academics: Ma. Antoinette C. Montealegre, Ph.D.  VP for University Relations & Advancement: Rosemarievic V. Diaz, Ph.D. Ma. Cynthia Rose B. Bautista, Ph.D., CHED  Bienvenido F. Nebres, S.J., Ph.D., Ateneo de Manila University  Carmela C. Oracion, Ph.D., Ateneo de Manila University  Minella C. Alarcon, Ph.D., CHED Gareth Price, Sheffield Hallam University  Stuart Bevins, Ph.D., Sheffield Hallam University

Course Development Officers:  John Carlo P. Fernando, Danie Son D. Gonzalvo, Stanley Ernest G. Yu Lead for Policy Advocacy and Communications:  Averill M. Pizarro Teacher Training Officers:  Ma. Theresa C. Carlos, Mylene E. Dones Monitoring and Evaluation Officer:  Robert Adrian N. Daulat Administrative Officers:   Ma. Leana Paula B. Bato, Kevin Ross D. Nera, Allison A. Danao, Ayhen Loisse B. Dalena Printed in the Philippines by EC-TEC Commercial, No. 32 St. Louis Compound 7, Baesa, Quezon City, [email protected]


This Teaching Guide by the Commission on Higher Education is licensed under a Creative Commons AttributionNonCommercial-ShareAlike 4.0 International License. This means you are free to: Share — copy and redistribute the material in any medium or format Adapt — remix, transform, and build upon the material. The licensor, CHED, cannot revoke these freedoms as long as you follow the license terms. However, under the following terms: Attribution — You must give appropriate credit, provide a link to the license, and indicate if changes were made. You may do so in any reasonable manner, but not in any way that suggests the licensor endorses you or your use. NonCommercial — You may not use the material for commercial purposes. ShareAlike — If you remix, transform, or build upon the material, you must distribute your contributions under the same license as the original.

Table of Contents Introduction to Financial Management

Part 3

170

184

1

Part 4

Part 2

10

Sources and Uses of Short-Term and Long-Term Funds

Part 3

19

Part 1 Part 2

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Review of Financial Statement Preparation, Analysis, and Interpretation

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Part 1

201

214

37

Basic Long-term Financial Concepts

Part 2

54

Part 1

222

Part 3

60

Part 2

240

Part 4

68

Part 3

248

76

Part 4

255

87

Part 5

268

94

Introduction to Investment

99

Part 1

285

Part 2

300

119

Managing Personal Finance

314

139

Biographical Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

323

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Part 1

Part 5

Part 7 Part 8

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Part 6

Financial Planning Tools and Concepts Part 1 Part 2


Introduction

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As the Commission supports DepEd’s implementation of Senior High School (SHS), it upholds the vision and mission of the K to 12 program, stated in Section 2 of Republic Act 10533, or the Enhanced Basic Education Act of 2013, that “every graduate of basic education be an empowered individual, through a program rooted on...the competence to engage in work and be productive, the ability to coexist in fruitful harmony with local and global communities, the capability to engage in creative and critical thinking, and the capacity and willingness to transform others and oneself.”

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To accomplish this, the Commission partnered with the Philippine Normal University (PNU), the National Center for Teacher Education, to develop Teaching Guides for Courses of SHS. Together with PNU, this Teaching Guide was studied and reviewed by education and pedagogy experts, and was enhanced with appropriate methodologies and strategies.

The SHS for SHS Framework, which stands for “Saysay-Husay-Sarili for Senior High School,” is at the core of this book. The lessons, which combine high-quality content with flexible elements to accommodate diversity of teachers and environments, promote these three fundamental concepts:

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SHS for SHS Framework

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Furthermore, the Commission believes that teachers are the most important partners in attaining this goal. Incorporated in this Teaching Guide is a framework that will guide them in creating lessons and assessment tools, support them in facilitating activities and questions, and assist them towards deeper content areas and competencies. Thus, the introduction of the SHS for SHS Framework.

SAYSAY: MEANING

HUSAY: MASTERY

SARILI: OWNERSHIP

Why is this important?

How will I deeply understand this?

What can I do with this?

Through this Teaching Guide, teachers will be able to facilitate an understanding of the value of the lessons, for each learner to fully engage in the content on both the cognitive and affective levels.

Given that developing mastery goes beyond memorization, teachers should also aim for deep understanding of the subject matter where they lead learners to analyze and synthesize knowledge.

When teachers empower learners to take ownership of their learning, they develop independence and selfdirection, learning about both the subject matter and themselves.


This Teaching Guide is mapped and aligned to the DepEd SHS Curriculum, designed to be highly usable for teachers. It contains classroom activities and pedagogical notes, and is integrated with innovative pedagogies. All of these elements are presented in the following parts:

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Introduction Highlight key concepts and identify the essential questions Show the big picture Connect and/or review prerequisite knowledge Clearly communicate learning competencies and objectives Motivate through applications and connections to real-life Motivation Give local examples and applications Engage in a game or movement activity Provide a hands-on/laboratory activity Connect to a real-life problem Instruction/Delivery Give a demonstration/lecture/simulation/hands-on activity Show step-by-step solutions to sample problems Give applications of the theory Connect to a real-life problem if applicable Practice Discuss worked-out examples Provide easy-medium-hard questions Give time for hands-on unguided classroom work and discovery Use formative assessment to give feedback Enrichment Provide additional examples and applications Introduce extensions or generalisations of concepts Engage in reflection questions Encourage analysis through higher order thinking prompts Evaluation Supply a diverse question bank for written work and exercises Provide alternative formats for student work: written homework, journal, portfolio, group/individual projects, student-directed research project

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1. • • • • • 2. • • • • 3. • • • • 4. • • • • 5. • • • • 6. • •

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Parts of the  Teaching Guide


On DepEd Functional Skills and CHED College Readiness Standards

The alignment of both standards, shown below, is also presented in this Teaching Guide - prepares Senior High School graduates to the revised college curriculum which will initially be implemented by AY 2018-2019.

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The DepEd articulated a set of 21st century skills that should be embedded in the SHS curriculum across various subjects and tracks. These skills are desired outcomes that K to 12 graduates should possess in order to proceed to either higher education, employment, entrepreneurship, or middle-level skills development.

On the other hand, the Commission declared the College Readiness Standards that consist of the combination of knowledge, skills, and reflective thinking necessary to participate and succeed without remediation - in entry-level undergraduate courses in college.

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As Higher Education Institutions (HEIs) welcome the graduates of the Senior High School program, it is of paramount importance to align Functional Skills set by DepEd with the College Readiness Standards stated by CHED.

College Readiness Standards Foundational Skills Produce all forms of texts (written, oral, visual, digital) based on:

Solid grounding on Philippine experience and culture; An understanding of the self, community, and nation; Visual and information literacies, media literacy, critical thinking Application of critical and creative thinking and doing processes; and problem solving skills, creativity, initiative and self-direction Competency in formulating ideas/arguments logically, scientifically, and creatively; and Clear appreciation of one’s responsibility as a citizen of a multicultural Philippines and a diverse world;

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1. 2. 3. 4. 5.

DepEd Functional Skills

Global awareness, scientific and economic literacy, curiosity, critical thinking and problem solving skills, risk taking, flexibility and adaptability, initiative and self-direction

Work comfortably with relevant technologies and develop adaptations and innovations for significant use in local and global communities

Global awareness, media literacy, technological literacy, creativity, flexibility and adaptability, productivity and accountability

Communicate with local and global communities with proficiency, orally, in writing, and through new technologies of communication

Global awareness, multicultural literacy, collaboration and interpersonal skills, social and cross-cultural skills, leadership and responsibility

Interact meaningfully in a social setting and contribute to the fulfilment of individual and shared goals, respecting the fundamental humanity of all persons and the diversity of groups and communities

Media literacy, multicultural literacy, global awareness, collaboration and interpersonal skills, social and cross-cultural skills, leadership and responsibility, ethical, moral, and spiritual values

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Systematically apply knowledge, understanding, theory, and skills for the development of the self, local, and global communities using prior learning, inquiry, and experimentation


K to 12 BASIC EDUCATION CURRICULUM SENIOR HIGH SCHOOL – ACADEMIC TRACK

Grade: 12 Core Subject Title: Business Finance

Semester: 2nd No. of Hours/ Semester: 80 hours/ semester Prerequisite: Fundamentals of ABM1 Co-requisite: Fundamentals of ABM2

1. Introduction to Financial Management

CONTENT STANDARD

The learners demonstrate an understanding of…

LEARNING COMPETENCIES

The learners are able to…

The learners…

1. define Finance 2. describe who are responsible for financial management within an organization 3. describe the primary activities of the financial manager 4. describe how the financial manager helps in achieving the goal of the organization 5. describe the role of financial institutions and markets

1.

explain the major role of financial management and the different individuals involved

2.

distinguish a financial institution from financial instrument and financial market

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the definition of finance, the activities of the financial manager, and financial institutions and markets

PERFORMANCE STANDARD

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CONTENT

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Subject Description: This course deals with the fundamental principles, tools, and techniques of the financial operation involved in the management of business enterprises. It covers the basic framework and tools for financial analysis and financial planning and control, and introduces basic concepts and principles needed in making investment and financing decisions. Introduction to investments and personal finance are also covered in the course. Using the dual-learning approach of theory and application, each chapter and module engages the learners to explore all stages of the learning process from knowledge, analysis, evaluation, and application to preparation and development of financial plans and programs suited for a small business.

K to 12 Senior High School Accountancy, Business and Management Strand – Business Finance May 2016

3.

4.

5.

CODE

ABM_BF12-IIIa-1

ABM_BF12-IIIa-2

enumerate the varied financial institutions and their corresponding services

ABM_BF12-IIIa-3

compare and contrast the varied financial instruments

ABM_BF12-IIIa-4

explain the flow of funds within an organization – through and from the enterprise—and the role of the financial manager

ABM_BF12-IIIa-5


Page 1 of 7


2. Review of Financial Statement Preparation, Analysis, and Interpretation

the process of preparing financial statements as well as the methods or tools of analysis of financial statements, including horizontal analysis, vertical analysis, and financial ratios to test the level of liquidity, solvency, profitability, and stability of the business

PERFORMANCE STANDARD solve exercises and problems that require financial statement preparation, analysis, and interpretation using horizontal and vertical analyses and various financial ratios


1.

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2.


CODE

prepare financial statements

ABM_BF12-IIIb-6

define the measurement levels, namely, liquidity, solvency, stability, and profitability

ABM_BF12-IIIb-7

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CONTENT STANDARD

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CONTENT

3.

perform vertical and horizontal analyses of financial statements of a single proprietorship

4.

compute, analyze, and interpret financial ratios such as current ratio, working capital, gross profit ratio, net profit ratio, receivable turnover, inventory turnover, debtto- equity ratio, and the like


ABM_BF12-IIIb-8

ABM_BF12-IIIb-9

Page 2 of 7


CONTENT STANDARD

3. Financial Planning Tools and Concepts

the financial planning process, including budget preparation, cash management, and working capital management



CODE

1. illustrate the financial planning process 2. prepare budgets such as projected collection, sales budget, production budget, income projected statement of comprehensive income, projected of financial position, and projected cash flow statement

1.

identify the steps in the financial planning process

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CONTENT

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2.

ABM_BF12-IIIc-d-10

illustrate the formula and format for the preparation of budgets and projected financial statement

ABM_BF12-IIIc-d-11

explain tools in managing cash, receivables, and inventory

ABM_BF12-IIIc-d-12

cite bank and nonbank institutions in the locality that would serve as possible sources of funds for business operations

ABM_BF12-IIIe-f-13

compare and contrast the loan requirements of the different bank and nonbank institutions

ABM_BF12-IIIe-f-14

3. describe concepts and tools in working capital management

Sources and uses of shortterm and long-term funds

the sources and uses of shortterm and long-term funds , and the requirements , procedure , obligation to creditor, and reportorial necessities

1. distinguish debt and equity financing 2. identify the bank and nonbank institutions in the vicinity that are possible sources of funds, and enumerate their requirements and process for loan application

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4.

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3.

1.

2.

3. 4. 5.


draw a flow chart on the steps in loan application list down obligations of entrepreneurs to creditors identify uses of funds


ABM_BF12-IIIe-f-15 ABM_BF12-IIIe-f-16 ABM_BF12-IIIe-f-17

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CONTENT 5.

Basic Long-term Financial Concepts

CONTENT STANDARD basic concepts of risk and return, and the time value of money

PERFORMANCE STANDARD 1. distinguish simple and compound interest

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calculate future value and present value of money

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2. solve exercises and problems in computing for time value of money with the aid of present and future value tables


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3. prepare loan amortization tables

2.

3.

4. compute for the net present value of a project with a conventional cash-flow pattern

4.

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5. describe the risk-return trade-off


5.

CODE

ABM_BF12-IIIg-h-18

compute for the effective annual interest rate

ABM_BF12-IIIg-h-19

compute loan amortization using mathematical concepts and the present value tables

ABM_BF12-IIIg-h-20

apply mathematical concepts and tools in computing for finance and investment problems

ABM_BF12-IIIg-h-21

explain the risk-return trade-off

ABM_BF12-IIIg-h-22


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CONTENT Introduction to investment

the definition, purpose, kinds, advantages, and disadvantages and the risks of investment



CODE

1. identify the types of investments particularly bank deposits , insurance, real estate , hard assets, mutual funds, and stocks and bonds 2. indicate the advantages and disadvantages of each type of investment 3. explain the risks inherent in each type of investment

1. compare and contrast the different types of investments

ABM_BF12-IVm-n-23


the philosophy and practices in personal finance

1. identify money management philosophy

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7.

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6.

CONTENT STANDARD

2. apply basic personal finance principles and practices in earning, spending, saving, and investing money


2. classify investment according to its type and features, and advantages and disadvantages

ABM_BF12-IVm-n-24

3. measure and list ways to minimize or reduce investment risks in simple case problems

ABM_BF12-IVm-n-25

1. enumerate money management philosophies

ABM_BF12-IVo-p-26

2. illustrate the money management cycle and gives examples of sound practices in earning, spending, saving, and investing money

ABM_BF12-IVo-p-27


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CODE BOOK LEGEND

ABM_BF12-IIIa-1

LEGEND

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SAMPLE CODE:

SAMPLE

Accountancy, Business and Management Strand

Track/ Strand

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underscore_

Roman Numeral *Zero if no specific quarter

Business Finance

Grade Level

12

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Lowercase Letter *Put a hyphen (-) in between letters to indicate more than a specific week

Track/ Strand Subject

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First Entry

Arabic Number

ABM_BF12

-

Quarter

Quarter

III

Week

Week

a

Competency


explain the major role of financial management and the different individuals involved


1

Page 6 of 7

References:


Bernstein, Leopold. Financial Statement Analysis, 4th Ed. Illinois: Irwin, 2014. Brealey, Richard A., Myers, Stewart.C. and Marcus, Alan .J. Fundamentals of Corporate Finance , 3rd Edition. New York: Mc-Graw Hill Co., 2014.

Cabrera, Elenita B. Management Advisory Services. Manila: Conanan, 2015. Cabrera, Elenita B. Management Consulting. Manila: Conanan, 2015.

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Cecchetti, Stephen G. Money, Banking and Financial Markets, 2nd Edition. 2010

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Brigham, Eugene F. Fundamentals of Corporate Finance, 8th Ed. Canada: Dryden, 2010

Cruise, Tom. The Firm. DVD. Directed by Sydney Pollack. USA: Paramount, 1993.

Eakins, Stanley G. The Study Guide. North Carolina: East Carolina University, 2014.

Gitman, Lawrence J. and Joehnick, Michael D. Fundamentals of Investing, 8 th Edition. Boston: Addison Welsey, 2013.

http://suppscentral.aw.com

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Gitman, Lawrence J. Principles of Financial Management. New York: Pearson 2014

Ilano, Alberto R. Investment Management and The Philippine Stock Market . Manila: FINEX, 2014

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Melicher, Ronald W. and Norton,Edgar A. Introduction to Finance, Markets, Investments and Financial Management, 14th Edition. Canada: McGraw-Hill Ryerson Higher Education, 2014. Padilla, Nicanor B. Jr. How to Analyze Financial Statements. Manila: Conanan, 2007. Pringle, John J. and Harris, Robert Samuel. Essentials of Managerial Finance, 2nd E. Canada: Dryden, 2014. Saldana, Cesar G. Principles of Managerial Finance: Philippine Setting. Quezon City: AFA Publications, 2000. Weston, Fred and Copland, Thomas E. Managerial Finance, 9th Ed., Canada: Dryden, 2012. White, Gerald I., Sondhi, Ashwinpaul C., and Fried, Dov. The Analysis and Use of Financial Statements, New Jersey: Wiley, 2012. www.aw-bc.com/gitman K to 12 Senior High School Accountancy, Business and Management Strand – Business Finance May 2016


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Business'Finance

90 MINS

Introduction to Financial Management Introduction Introduction to Finance and Key Concepts /Motivation

40

Instruction

45

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Performance Standards The learners will be able to define finance.

LESSON OUTLINE

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Content Standards The learners demonstrate an understanding of the definition of finance, the activities of the financial manager, and the financial institutions and markets.

Learning Competency The learners shall be able to explain the major role of financial management and the different individuals involved. (ABM_BF12-IIIa-1)

Enrichment Integration of learning Materials

Board Notes

Resources

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Specific Learning Outcomes The learners will be able to:

Discussion of Shareholder’s Wealth

• Have an appreciation of what the overall objective of management should be.

(1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex Bookstore. (2) Gitman, L. J. & Zutter C. J. (2012), Principles of Managerial Finance (13th Ed), USA: Prentice-Hall

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• Describe the goals of the firm and explain why maximizing the value of the firm is an appropriate goal for a business. • Identify factors that influence the change in market price.

1 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

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DAY 1 SESSION 1. Distribute the Course Outline/Curriculum and read the subject description. Go through the various topics and highlight the following: Coverage of first quarter exam Date of first quarter exam Coverage of second quarter exam Date of second quarter exam

3. • • • •

Ask the learners to introduce themselves by answering the following suggested questions: What is your full name? What is your nickname? Why did you choose the ABM Strand? What are your expectations for this class?

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2. • • • •

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4. Homework for next session: 5. On a sheet of paper, answer the following questions: A. How much is your daily allowance? If not given daily, how much is your average allowance per day? B. Write down all the items you spend money on. List the description and peso amount spent. C. Compute for the balance of your allowance by deducting the expenses you listed from your daily allowance. D. If the answer to Question C is positive, what do you do with the money left? If the answer is negative, where do you get additional money?

INTRODUCTION/MOTIVATION (40 MINS)

1. Finance in Everyday Life • Begin by presenting a scenario in everyday life (Try: the life of a high school student). • Narrate the scenario in your own style or as prescribed below: - Ask the learners how much allowance they are given to and how often do they receive it (daily, weekly, etc.) - Continue discussing the activities done in a day from getting to school, to attending flag ceremony, classroom discussions, lunch breaks, end of classes, occasional meriendas or going out with friends and playing computer games, going back home and going back out to a 2 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

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nearby store to buy autoload because they realized that they can’t end the day without texting their crush. - Ask learners how many have savings out of the allowance they get from their parents. - End the story by identifying the expenses they incurred (i.e. tricycle fare, lunch, merienda, computer games) and letting them recognize the value of savings and possibly investing at a young age. - Reveal that most of the activities they do involving decisions on where to use their allowance is a finance decision.

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2. Present Relevant Vocabulary • Define Finance as follows: - Finance can be defined as the science and art of managing money. (Gitman & Zutter, 2012)

• Engage the learners by exhausting from them the expenses they wrote down on their homework and listing all these down on the board with the respective peso amounts. Try to get as many answers as possible.

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• Give an allowance cap based on the answers given by the learners during the beginning story. This will serve as the average daily allowance that the class is able to spend.

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• Go back to the list of expenses and ask for the total peso amount of the listed items. If the peso amount exceeds the daily allowance, ask the learners which items should be dropped off from the list. Cross out the items dropped but do not erase completely. Continue this until total items remaining in the list can be covered by the daily allowance. • Explain that the activity they did is called budgeting. - Budgeting is the act of estimating revenue (in the form of their allowance) and expenses over a period of time (in this case, on a daily basis). - Inform them that budgeting will be further discussed in Lesson 3 – Financial Planning Tools. • Go back to the activity and focus the learners’ attention on the surplus resulting from their budgeting. Ask the learners who among them had answered on their homework which resulted in savings or excess cash. Ask them what they do with the excess money. - Possible answers: 3


Teacher Tips: Terms Defined: 1. Finance 2. Budgeting 3. Investments 4. Sources of funds

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• Carry over to the next day • Return to parents • Save. Ask how and where? Coin savers, Hidden under their beds, Deposit in banks, Invest in stocks (rare answer) - Explain that excess money presents an opportunity for investments. Investments come in many forms that will generate income or appreciate in the future. - Between hiding their cash under their bed and depositing it in the bank, it would be better to keep their money in bank deposits because these earn interest. - Inform the learners that investments will be discussed further in Lesson 6 – Introduction to investments.

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• Go back to the activity that is written in the board. Post the question of what other problems they may face in making financial decisions. Let them assume that all the expenses listed on the board (including those that were previously crossed out) are incurred during the day. Let them compute how much more cash they would need to support all those expenses. • Ask who among the learners who made their homework encountered the same situation. If none, ask them if ever they are in a situation where they are short of cash, what would they do? Where will they get extra cash? What other sources of cash do they know?

- Possible answers:

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• Ask from parents • Borrow from a friend • Fund raising activities • Pawnshops • 5/6 • Banks - Explain that all their answers are sources of funds. When faced with financial difficulties (in this case, the lack of funds to meet the current expenses) we look for people or institutions that will give us the money we need. - Inform the learners that they will know more about where to get funds on Lesson 4 – Sources of short term and long term funding. • Summarize the discussion by pointing out that, for individuals, Finance is concerned with decisions about: - How much of their earnings they spend - How much they save or how much they need - How they invest their savings - How they raise additional funds they need (Gitman)


3. Review of Prerequisite Knowledge • Tell the learners that once they graduate from school, they will no longer receive their daily allowance. Either they would be employed by a company, manage their family business, or start up their own business. • Ask the learners who among them wants to own their own business (get a raise of hands). Ask them what type of business organization is owned by one person who operates it for his or her own profit (Answer: Sole Proprietorship).

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• Continue to recall from ABM 1 the forms of business organizations: - Sole Proprietorship - A business owned by one person and operated for his or her own profit. - Partnership - A business owned by two or more people and operated for profit. - Corporation – An entity created by law owned by shareholders.

• Ask the learners if they recall how they can be shareholders of a corporation (Answer: by buying stocks). At this point, ask them if they are aware of big listed companies like PLDT, Globe, JFC, BPI, Banco Deo Oro, San Miguel Corporation, among others to interest them about the subject.

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• Ask how and where can they buy stocks? - Corporations may either be privately owned or publicly owned. - Privately owned corporations are often owned by family members whose stocks may not be offered to outsiders unless consent by the family members is secured. - Companies which are publicly listed are owned by unrelated investors and are traded in organized exchanges like the Philippine Stock Exchange. While there are many stockholders, there is generally a group of investors or a family which controls each listed company. For example, in the case of BPI, the biggest stockholder is Ayala Corporation and in the case of Banco De Oro, it is SM Investment Corporation. Prices of stocks of listed corporations are driven by several factors such as the earnings of the companies, the prospects of the industry where these companies operate, the general market sentiment, and the economic prospects of the country, among others. 4. Knowing the Shareholder • Tell the learners to assume that they are the biggest shareholder in a corporation. Ask them the objectives they want to achieve as owners of the corporation. - Possible answers: Be profitable, Have a lot of cash • Ask if they think a profitable company is a successful company. Can success be attributed to profitability only? Recall that the determination of profit is based on the accrual method. Is it possible that a company can have profits but still does not have enough cash to pay its obligations (i.e. suppliers, lenders)? What will happen if the company cannot pay its obligations? 5


• Ask the learners what they think of a company who has very large amount of cash. (Possible answer: They may say that this is good because the company will always have enough cash to pay its obligations.) Tell them that though having a lot of cash has its advantages, it also signals unhealthy company practices. It may tell them that management has not been putting the company’s resources into good use. Also, keeping too much cash in the books is like hiding your extra allowance under their bed. They will be missing out on investment opportunities.

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• Reveal that the overall objective of a shareholder should be wealth maximization. What defines a shareholder’s wealth? Reveal the answer using the example below.

INSTRUCTION (45 MINS)

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1. Measurement of the shareholder’s wealth • Post the question of how do we measure shareholders wealth? Simplify the example. - Assume a learner bought 10 shares of Globe Telecom at PHP2,510 each on September 9, 2010. This brings his investments to PHP25,100. What happens to the value of his investment if the price goes up to PHP2,600 per share or it goes down to PHP2,300 per share?

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• Conclude that shareholders’ wealth is measured based on the current market price of the corporation’s stocks. The market price changes across different periods. Hence, the value of your investment changes in different points on time based on the market value at that time. • At this point, start discussing the factors which can affect prices. 2. Factors that Influence Market Price • Group the factors into two: Factors that the Management can control and external factors that cannot be controlled by management.


Teacher Tips: An increase of the share price to PHP2,600 per share means that people are willing to buy the shares for that amount. If the learners were to sell their shares at this point, it will result to a profit of PHP90 per share or PHP900 on their whole investment. Hence, the value of their investment increased from PHP25,100 to PHP26,000. Therefore, there is an increase in shareholder’s wealth. On the other hand, a decrease in the share price to PHP2,300 per share means that people are only willing to buy shares for PHP2,300. If the learners were to sell their investment at this point, they will receive PHP23,000 which would result to a loss of PHP2,100. The decrease in value of their investment leads to a decrease in shareholder’s wealth.

Uncontrollable External Factors

• profitability • having a good liquidity and reasonable leverage position • dividends • competent management which affects the company’s operating efficiency • coming up with corporate plans that improve the business prospects of the company

• macroeconomic conditions • political stability • prospects of the industry where the company operates • general market sentiment • flow of foreign funds invested in the Philippine stock market

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Controllable by Management

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• Discuss how each factor influences market price - Profitability • Profit is a measure of the financial performance of a company for a period of time. • Although it is a major driver for increasing the value of stock, an investor should not rely on profits alone. As discussed earlier, it is possible that the company has profits but its cash flow is negative. - Examples: Suppose the following Income Statements and Cash Flow Statements of companies A, B and C were presented to you. Which do you think is a more attractive company? COMPANY A

COMPANY B

Income Statement

Cash Flows

P 100,000

Collection from Customers

Less: Costs

50,000

Payment of Expenses

Profits

P 50,000

Net Cash Flow

COMPANY C Income Statement

P0

Cash Flows

Sales

P 100,000


P 100,000

50,000

Less: Costs

150,000

Payment of Expenses

50,000

(P 50,000)

Profits

(P 50,000)

Net Cash Flow

P 50,000

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Sales

Income Statement

Cash Flows

Sales

P 100,000


P 100,000

Less: Costs

70,000

Payment of Expenses

70,000

Profits

P 30,000

Net Cash Flow

P 30,000 7 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

• Company A is profitable but generated negative cash flows which resulted from the uncollected accounts receivable of PHP100,000. Without adequate cash inflows to meet its obligations, the company will face liquidity problems, regardless of its level of profits. • Company B on the other hand has a positive cash flow but is unprofitable. This is a result of the company’s delay in payment of its costs. Accordingly, the Company will soon have to pay the remaining PHP100,000 liability and its cash will no longer be sufficient. Again, without adequate cash inflows to meet its obligations, the company will face liquidity problems. • Company C is profitable and has a positive cash flow. Based on the information provided, Company C seems to be the best.

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- Good liquidity and reasonable leverage position.

• Liquidity and leverage refers to the company’s management of the type and amount of assets and liabilities that it will hold in the course of its operations. This will further be discussed in Lesson 2.

C O

- Dividends.

- Competent management.

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• Holders of shares receive dividends from a corporation as returns on their investments in form of cash or other properties. Companies which have better dividend policies are generally more attractive than companies who do not pay out dividends. • Note that there may be times that companies do not pay out dividends because of future expansions. Same with the other factors affecting share price, dividend policies should go hand in hand with other factors in determining market price.

• Competent managers may have any of the following attributes: 1) visionary 2) decisive 3) people-oriented, 4) inspiring, 5) innovative, 6) respected and 7) experienced/seasoned manager.

- Corporate plans that improve the business prospects.

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• Example: Company A which is in the business of selling Halo-halo in the Dapitan area (or any other area) for 5 years. Company A is consistently earning profits and has a positive cash flow. When asked how Company A sees itself after 5 more years, Company A answered that it would continue to sell Halo-halo in Dapitan (or any other area). • On the other hand, Company B sells Buko Juice in Katipunan area (or any other area different from Company A’s area) for 5 years. Company B is consistently earning profits and has a positive cash flow. When asked how Company B sees itself after 5 more years, Company B answered that it has generated enough cash to expand its business to Cubao area (or any other area) to take advantage of the growing demand of Buko Juice in Cubao. • Between Company A and Company B, which would be a better investment? Company B. Since it has more concrete future prospects allowing investors to hope for better revenues and net income.

• External Factors - These factors influences the general reaction of investors in making an investment decision. 8


- Its effect is not only to a specific company but on all companies or a group of companies under similar circumstances.

- Such factors are a result of the environment a company operates in rather than the decisions of the company’s management.

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ENRICHMENT (5 MINS)

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C O

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3. Role of Financial Management • Ask the learners, given the factors that influence market price, how will the company ensure that such objectives will be achieved? Reveal the answer that this is achieved through financial management. • Financial management deals with decisions that are supposed to maximize the value of shareholders’ wealth. (Cayanan) - These decisions will ultimately affect the markets perception of the company and influence the share price. - The goal of financial management is to maximize the value of shares of stocks. - Managers of a corporation are responsible for making the decisions for the company that would lead towards shareholders’ wealth maximization. • Tell the learners that for the next parts of this course, they will fill in the shoes of a Chief Financial Officer (CFO) and every problem that they will encounter for this course should be dealt with having shareholders wealth maximization in mind.

1. Integration of Learning • Ask the learners the following: - Aside from the factors mentioned during class, what other factors can influence the investor’s perception on the company’s performance which would ultimately affect share price? - Why is the study of finance important to you? 2. Homework • Go to a business in your locality. Ask who is in charge of the finances of the business. Interview the “Chief Financial Officer (“CFO”) or the Vice-President for Finance” and ask them to report about their roles and functions within the organization. 9 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Teacher Tips: Possible answers: Ethics, Corporate Social Responsibilities, Employee Relationships.

Business'Finance

60 MINS

Introduction to Financial Management LESSON OUTLINE Introduction Identifying the roles in a Corporate

PY


Organization

Performance Standards The learners will be able to:

Motivation

• Describe the primary activities of the financial manager.

C O

• Describe who are responsible for financial management within an organization.

Instruction

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• Describe how the financial manager helps in achieving the goal of the organization.

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Learning Competencies The learners shall be able to: • Explain the major role of financial management and the different individuals involved. (ABM_BF12-IIIa-1) • Explain the flow of funds within an organization – through and from the enterprise—and the role of the financial manager. (ABM_BF12-IIIa-5)

Message from the CFOs Identifying the functions of a Financial Manager

Enrichment Integration of learning Materials

Board Notes

Resources (1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex Bookstore. (2) Gitman, L. J. & Zutter C. J. (2012), Principles of Managerial Finance (13th Ed), USA: Prentice-Hall

Specific Learning Outcomes At the end of this lesson, the learners will be able to:

• Understand the key positions in a corporate organization and identify the roles of each. • Identify the primary activities of the financial manager.


25 5 25 5

INTRODUCTION (25 MINS) Teacher Tips: The various types of functions are expected if the person they interviewed is a small business owner who makes decisions on various aspects of the business.

C O

PY

1. Discussion of Homework • Begin by asking at least five learners to share in class the result of their interview with a Chief Financial Officer (CFO) or Vice-President for Finance. • Write on the board the roles and functions that the students identified from their interview. • Take note of functions that are not roles of a Financial Manager but are roles of other managerial positions. • Discuss that these functions are done by people in the company who are holding other managerial positions. A Financial Manager is part of a management team whose ultimate goal is to maximize shareholders wealth. 2. The Corporate organization Structure • Illustrate the corporate organization structure and inform them that this particular set of people each play a role in the decision making of the company.

elects

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SHAREHOLDERS OWNERS

BOARD OF DIRECTORS

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appoints

PRESIDENT (CEO)

VP FOR MARKETING

VP FOR FINANCE

VP FOR PRODUCTION

MANAGERS

VP FOR ADMINISTRATION

Figure 1: Illustration of the Corporate Organization Structure • From the diagram presented, emphasize that each line is working for the interest of the person on the line above them. Since the managers of the company are making decisions for the interest of 11


the board of directors and the board of directors does the same for the interest of the shareholders, it follows that the goal of each individual in a corporate organization should have an objective of shareholders’ wealth maximization.

ED

C O

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• Discuss briefly the roles of each position identified. • Shareholders: The shareholders elect the Board of Directors (BOD). Each share held is equal to one voting right. Since the BOD is elected by the shareholders, their responsibility is to carry out the objectives of the shareholders otherwise, they would not have been elected in that position. Ask the learners again what the objective of the shareholders is just to refresh. • Board of Directors: The board of directors is the highest policy making body in a corporation. The board’s primary responsibility is to ensure that the corporation is operating to serve the best interest of the stockholders. The following are among the responsibilities of the board of directors: - Setting policies on investments, capital structure and dividend policies. - Approving company’s strategies, goals and budgets. - Appointing and removing members of the top management including the president. - Determining top management’s compensation. - Approving the information and other disclosures reported in the financial statements (Cayanan, 2015) • President (Chief Executive Officer): The roles of a president in a corporation may vary from one company to another. Among the responsibilities of a president are the following: - Overseeing the operations of a company and ensuring that the strategies as approved by the board are implemented as planned. - Performing all areas of management: planning, organizing, staffing, directing and controlling. - Representing the company in professional, social, and civic activities.

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• Tell the learners that although the president carries out the decision making for all functions, it would be difficult for him/her to do this alone. The president cannot manage the company on his own, especially when the corporation has become too big. To assist him are the vice presidents of different functional areas: finance, marketing, production and administration. • Determine from the list of roles written on the board the functions that pertain to the respective VPs. Add the following functions if needed: • VP for Marketing: The following are among the responsibilities of VP for Marketing - Formulating marketing strategies and plans. - Directing and coordinating company sales. - Performing market and competitor analysis. - Analyzing and evaluating the effectiveness and cost of marketing methods applied. - Conducting or directing research that will allow the company identify new marketing opportunities, e.g. variants of the existing products/services already offered in the market. - Promoting good relationships with customers and distributors. (Cayanan, 2015) 12


C O

PY

• VP for Production: The following are among the responsibilities of VP for Production: - Ensuring production meets customer demands. - Identifying production technology/process that minimizes production cost and make the company cost competitive. - Coming up with a production plan that maximizes the utilization of the company’s production facilities. - Identifying adequate and cheap raw material suppliers. (Cayanan, 2015) • VP for Administration: The following are among the responsibilities of VP for Administration: - Coordinating the functions of administration, finance, and marketing departments. - Assisting other departments in hiring employees. - Providing assistance in payroll preparation, payment of vendors, and collection of receivables. - Determining the location and the maximum amount of office space needed by the company.Identifying means, processes, or systems that will minimize the operating costs of the company. (Cayanan, 2015) • Finally, focus the learners’ attention to the role of the VP for finance as this is where the rest of the topics for this course will revolve.

MOTIVATION (5 MINS)

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Message from the CFOs • Share the following quotes from the Chief Financial Officers (CFOs) of the respective corporations: - Unilever: “Finance plays a critical role across every aspect of our business. We enable the business to turn our ambition and strategy into sustainable, consistent and superior performance” - Jean-Marc Huët (Unilever) - Jollibee: “It’s very exciting because you are not just thinking of today but what the company will need in the future” - Ysmael V. Baysa (Morales, 2013) - Globe Telecom: “Yesterday’s solutions are never adequate for the future” - Albert De Larrazabal (Klobucher, 2015) - SM Corporation: “Now, we don’t go out because we need funds. We go out because it’s an opportunity.” – Jose T. Sio (Montealegre, 2015) • Reflect on the quotes cited and mention how critical and dynamic working in the finance field is.


INSTRUCTION (45 MINS) 1. Functions of a Financial Manager • Identify the four functions of a VP for finance (CFO) as follows: - Financing - Investing - Operating - Dividend Policies

Teacher Tips:

PY

Write the four functions on the board and identify what is the role of the Financial Manager in each function.

C O

• Recall from the previous session that there are situations when we are faced with lack of funds. Financing decisions include making decisions on how to fund long term investments (such as company expansions) and working capital which deals with the day to day operations of the company (i.e., purchase of inventory, payment of operating expenses, etc.).

Equity 100%

Liabilities

Assets

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75%

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• The role of the VP for Finance of the Financial Manager is to determine the appropriate capital structure of the company. Capital structure refers to how much of your total assets is financed by debt and how much is financed by equity. To illustrate, show/draw the figure below:

50%

25%

0% Total Assets

Capital Structure

Table 1: Sample Capital Structure 14 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Teacher Tips: Financing – to determine the appropriate capital structure of the company and to raise funds from debt and equity.

PY

• Recall that Assets = Liabilities + Owner’s Equity. - To be able to acquire assets, our funds must have come somewhere. If it was bought using cash from our pockets, it is financed by equity. - On the other hand, if we used money from our borrowings, the asset bought is financed by debt. - In the figure above, the total assets is financed by 60% debt and 40% equity. Accordingly, the capital structure is 60% debt and 40% equity.

C O

• Ask the learners if they think there is an ideal mix of debt and equity across corporations? - Answer: No. The mix of debt and equity varies in different corporations depending on management’s strategies. It is the responsibility of the Financial Manager to determine which type of financing (debt or equity) is best for the company.

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• The advantages of debt and equity financing will be discussed in Lesson 5: Sources and Uses of Funds.

D EP

• Recall that, previously, you discussed investing as where to put your excess cash to make it more profitable. We expand that definition by including cash held taken from funds as a result of financing decisions. • Investments may either be short term or long term. - Short term investment decisions are needed when the company is in an excess cash position. • To plan for this, the Financial Manager should be able to make use of Financial Planning tools such as budgeting and forecasting which will be discussed in Lesson 3: Financial Planning Tools and Concepts. • Moreover, the company should choose which type of investment it should invest in that would provide an most optimal risk and return trade off. We will learn more about this on Lesson 6: Introduction to investments. - Long term investments should be supported by a capital budgeting analysis which is among the responsibilities of a finance manager. • Capital budgeting analysis is a tool to assess whether the investment will be profitable in the 15


Teacher Tips: A. Investing • Short term investments: 1. Plan for expected excess in cash using Financial Planning tools such as budgeting and forecasting 2. Choose which type of investment should it invest in that would secure the best profits • Long term investments: Prepare a capital budgeting analysis to determine if the long term investment will be profitable B. Operating - determine how to finance working capital accounts such as accounts receivable and inventories (short term vs. long term)

long run and will be further discussed in Lesson 5: Basic Long Term Financial Concepts. This is a crucial function of management especially if this investment would be financed by debt. • The lenders should have the confidence that the investments that management will push through with will be profitable or else they would not lend the company any money. Teacher Tips: There are two types of liquidity risk: A. Risk that the company will fail to pay its short term obligations. B. Risk that you will not be able to sell investments in financial assets immediately.

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ED

C O

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• Operating decisions deal with the daily operations of the company. The role of the VP for finance is determining how to finance working capital accounts such as accounts receivable and inventories. The company has a choice on whether to finance working capital needs by long term or short term sources. Why does a Financial Manager need to choose which source of financing a company should use? What do they need to consider in making this decision? - Short Term sources are those that will be payable in at most 12 months. This includes short-term loans with banks and suppliers’ credit. For short-term bank loans, the interest rate is generally lower as compared to that of long-term loans. Hence, this would lead to a lower financing cost. - Suppliers’ credit are the amounts owed to suppliers for the inventories they delivered or services they provided. While suppliers’ credit is generally free of interest charges, the obligations with them have to be paid on time to maintain good supplier relationship. Such relationships should be nurtured to ensure timely delivery of inventories. - Short term sources pose a trade-off between profitability and liquidity risk. Because this source matures in a short period, there is a possibility that the company may not be able to obtain enough cash to pay their obligation (i.e. liquidity risk). - Long term sources, on the other hand, mature in longer periods. Since this will be paid much later, the lenders expect more risk and place a higher interest rate which makes the cost of long term sources higher than short term sources. However, since long term sources have a longer time to mature, it gives the company more time to accumulate cash to pay off the obligation in the future. - Hence, the choice between short and long term sources depends on the risk and return trade off that management is willing to take. The learners will learn more about this on Chapter 4: Sources and uses of funds. • Dividend Policies. Recall that cash dividends are paid by corporations to existing shareholders based on their shareholdings in the company as a return on their investment. Some investors buy stocks because of the dividends they expect to receive from the company. Non-declaration of dividends may disappoint these investors. Hence, it is the role of a financial manager to determine when the company should declare cash dividends. 16


- Before a company may be able to declare cash dividends, two conditions must exist:

1. The company must have enough retained earnings (accumulated profits) to support cash dividend declaration. 2. The company must have cash. Teacher Tips: Dividend Policies - These determine when the company should declare cash dividends.

C O

PY

• Ask the learners what they think will affect the decision of management in paying dividends. Remind them that dividends come from the company’s cash and availability of unrestricted retained earnings. - Answer Key: • Availability of financially viable long-term investment • Access to long term sources of funds • Management’s Target Capital structure

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• Recall that one of the functions of a finance manager is investing and its available cash may be used to invest in long term investments that would increase the profitability of the company. Some small enterprises which are undergoing expansion may have limited access to long term financing (both long term debt and equity). This results to these small companies reinvesting their earnings into their business rather than paying them out as dividends.

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• On the other hand, a company which has access to long term sources of funds may be able to declare dividends even if they are faced with investment opportunities. However these investment opportunities are generally financed by both debt and equity. - The management usually appropriates a portion of retained earnings for investment undertakings and this may limit the amount of retained earnings available for dividend declaration. - Creditors are not willing to finance entirely the cost of a company’s long term investment. Hence, the need for equity financing (e.g. internally generated funds or issuance of new shares). - Examples of these companies are publicly listed companies such as PLDT, Globe Telecom, and Petron. PLDT and Globe are two of the Philippine listed companies which have generously distributed cash dividends for the last five years (information as of 2014). • For companies which have limited access to capital and have target capital structure, they may end up with a residual dividend policy. This means that when companies are faced with investment opportunities, internally generated funds will be used first to finance these investments and 17


dividends can only be declared if there are excess funds.

ENRICHMENT (5 MINS)

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ED

C O

PY

Integration of Learning • Ask the learners the following: - Explain why shareholder wealth maximization should be the overriding objective of management. - What other positions can you think of that are related to financial management? Answer: Treasurer, Controller. These are positions under the CFO)


Business'Finance

90 MINS

Introduction to Financial Management Introduction Introduce the concept of a Financial System

30

Instruction

45

C O

Performance Standards The learners will be able to describe the role of financial institutions and markets.

LESSON OUTLINE

PY


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ED

Learning Competencies The learners shall be able to: • Distinguish a financial institution from financial instrument and financial market. (ABM_BF12-IIIa-2) • Enumerate the varied financial institutions and their corresponding services. (ABM_BF12-IIIa-3) • Compare and contrast the varied financial instruments. (ABM_BF12-IIIa-4) • Explain the flow of funds within an organization – through and from the enterprise—and the role of the financial manager. (ABM_BF12-IIIa-5) Specific Learning Outcomes The learners will be able to:

Identify the types of Financial Markets, Financial Institutions, and Financial Instruments

Enrichment Integration of learning Evaluation Materials

Short Quiz on Financial Institutions, Markets, and Instruments Board Notes

Resources (1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex Bookstore. (2) Gitman, L. J. & Zutter C. J. (2012), Principles of Managerial Finance (13th Ed), USA: Prentice-Hall

• Prepare a diagram illustrating how the Financial System works. • Define Financial Markets, Financial Institutions and Financial Instruments. • Identify the types of Financial Markets, Financial Institutions and Financial Instruments.


5 10

INTRODUCTION/MOTIVATION (30 MINS) 1. Savings and Shortages • Recall from the previous discussions that one of the functions of a financial manager is financing and investing of funds.

PY

• Pick a random learner (A) and present a scenario that during his/her management of money, some cash will remain. Ask him/her what he/she should do with that cash. - Expected answer: Save or Invest

C O

• Ask your students if they are going to save their money, where would they keep it. - Expected answers: Banks, Piggy bank, Investments – stocks, mutual funds, insurance

ED

• Pick another learner (B) and ask B what business he/she would like to try. Now, suppose that he/she had the business running and is profitable for some time. B then decides to expand his/her business but does not have enough cash to pay for the expansion. Ask the students where can B get the additional funding? - Expected answers: Ask from parents, ask from friends, banks, lending institutions.

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• Suppose B knew that A had excess money and approached A to lend him/her the capital he/she needs to expand his/her business for a 20% interest. Since A observed that B’s business has been profitable, A is willing to lend B the money since he/she is confident that B can repay his loan. A is now expecting to be 20% richer from his lending to B and B can now expand his operations to gain more profit from his business. • Emphasize that this scenario where the lender and the borrower are present at the right time and at the right place may not happen all the time. In fact, it seldom happens. What happens if they did not meet? A will not be able to find someone to invest his money to and B cannot get funds to start his expansion. Here is where the Financial System comes in. 2. Role playing to introduce the concept of saving and investing • Draw two boxes and label with names of learners A and B. Below [A], write “Saver”, and below [B], write “users of funds”. 20 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Terms Defined: Financial Markets – organized forums in which the suppliers and users of various types of funds can make transactions directly

• Continue discussion as follows:

- If A knows that B is in need of funds, or if B knows that A is willing to invest funds, A and B may

agree to make a Private Placement. (Draw the box for Private Placement between A and B and link the boxes as shown in Figure 1.)

- However, if these facts are unknown to them, A and B can go to a Financial Market which is an

Financial Institutions – intermediaries that channel the savings of individuals, businesses, and governments into loans or investments. Private Placements - the sale of a new security directly to an investor or group of investors.

PY

organized forum that lets A, along with other suppliers of funds, and B, along with other users of funds, meet and make transactions. Once A and B have met in the Financial Market, they can now agree to make a private placement. (Draw the box for Financial Markets and link this to A and B as shown in Figure 1.)

Terms Defined:

C O

- If A and B do not want to make an effort to find a counterparty in the Financial Markets, A and B

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may go to a Financial Institution. A Financial Institution will receive A’s supply of funds and match it with B’s demand of funds. Unlike the Financial Markets were A and B knows to whom the fund went and from whom the funds came, Financial Institutions serve as an intermediary to the suppliers and users of funds. (Draw the box for Financial Institutions and link this to A and B as shown in Figure 1.)

- Moreover, Financial institutions actively participate in the financial markets as both suppliers and

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users of funds. (Draw the link between Financial Institutions and Financial Markets as shown in Figure 1.)

• Mention that the resulting diagram illustrates the Financial System.


Public Offering - The sale of either bonds or stocks to the general public. Financial Instruments – is a real or a virtual document representing a legal agreement involving some sort-of monetary value (Source: Investopedia - Sharper Insight. Smarter Investing. | Investopedia. (2016). Investopedia. Retrieved 8 May 2016, from http://investopedia.com). These can be debt securities like corporate bonds or equity like shares of stock.

Financial System

Financial Institutions

Private Placement

Flow of funds

C O

Financial Markets

[Learner B] Users/Demanders of Funds

PY

[Learner A] Savers/Suppliers of Funds

Flow of securities/notes/bonds/debt instruments

ED

Figure 1: The Financial System

- Answers: - Verbal agreement - Written agreement

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• Post the question of how transactions between suppliers and users of funds take place. How would they prove that there was a transaction so that the demander will be able to repay the supplier on time and at the right amount?

• Discuss that due to the increased need for security for the performance of obligations arising from these transactions and due to the growing size of the financial system, the transfers of funds from one party to another are made through Financial Instruments. • Note that on the diagram presented, the solid lines represent the flow of cash/funds, while the broken lines represent the flow of financial instruments which represent obligations to transfer cash or other assets in the future.


INSTRUCTION (45 MINS) Tell the learners that you will further discuss the composition of the Financial System and that you will identify the types of Financial Markets, Financial Institutions and Financial Instruments. 1. Financial Instruments

PY

• When a financial instrument is issued, it gives rise to a financial asset on one hand and a financial liability or equity instrument on the other.

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ED

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• Recall from ABM the following definitions: - A Financial Asset is any asset that is: • Cash • An equity instrument of another entity • A contractual right to receive cash or another financial asset from another entity. • A contractual right to exchange instruments with another entity under conditions that are potentially favorable. (IAS 32.11) • Examples: Notes Receivable, Loans Receivable, Investment in Stocks, Investment in Bonds - A Financial Liability is any liability that is a contractual obligation: • To deliver cash or other financial instrument to another entity. • To exchange financial instruments with another entity under conditions that are potentially unfavorable. (IAS 32) • Examples: Notes Payable, Loans Payable, Bonds Payable - An Equity Instrument is any contract that evidences a residual interest in the assets of an entity after deducting all liabilities. (IAS 32) • Examples: Ordinary Share Capital, Preference Share Capital • Ask the learners who are the holders of Financial Assets.

- Answer: Suppliers of Funds

• Ask who the makers of Financial Liabilities and Equity instruments are. - Answer: Users of Funds • Continue discussing that when companies are in need of funding, they either sell debt securities (or bonds) or issue equity instruments. The proceeds from the sale of the debt securities and issuance of bonds will be used to finance the company’s plans. On the other hand, investors buy debt securities of equity instruments in hopes of receiving returns through interest, dividend income or appreciation in the financial asset’s price. 23 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

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C O

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• Identify common examples of Debt and Equity Instruments. - Debt Instruments generally have fixed returns due to fixed interest rates. Examples of debt instruments are as follows: • Treasury Bonds and Treasury Bills are issued by the Philippine government. These bonds and bills have usually low interest rates and have very low risk of default since the government assures that these will be paid. • Corporate Bonds are issued by publicly listed companies. These bonds usually have higher interest rates than Treasury bonds. However, these bonds are not risk free. If the company which issued the bonds goes bankrupt, the holder of the bonds will no longer receive any return from their investment and even their principal investment can be wiped out. - Equity Instruments generally have varied returns based on the performance of the issuing company. Returns from equity instruments come from either dividends or stock price appreciation. The following are types of equity instruments: • Preferred Stock has priority over a common stock in terms of claims over the assets of a company. This means that if a company were to be liquidated and its assets have to be distributed, no asset will be distributed to common stockholders unless all the claims of the preferred stockholders have been given. Moreover, preferred stockholders have also priority over common stockholders in cash dividend declaration. Dividends to preferred stockholders are usually in a fixed rate. No cash dividends will be given to common stockholders unless all the dividends due to preferred stockholders are paid first. (Cayanan, 2015) • Holders of Common Stock on the other hand are the real owners of the company. If the company’s growth is spurring, the common stockholders will benefit on the growth. Moreover, during a profitable period for which a company may decide to declare higher dividends, preferred stock will receive a fixed dividend rate while common stockholders receive all the excess. • Ask the learners which of the financial instruments presented they find most appealing. • Inform them that they will learn more about the advantages and disadvantages of debt and equity instruments in Lesson 4: Sources and Uses of Funds and Lesson 5: Introduction to Investments. 2. Financial Markets

Terms Defined

• Recall the definition of financial markets from earlier discussion.

Primary Market - Financial market in which securities are initially issued; the only market in which the issuer is directly involved in the transaction.

24


C O

- Money Markets vs. Capital Markets

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• Money markets are a venue wherein securities with short-term maturities (1 year or less) are sold. They are created because some individuals, businesses, governments, and financial institutions have temporarily idle funds that they wish to invest in a relatively safe, interest-bearing asset. At the same time, other individuals, businesses, governments, and financial institutions find themselves in need of seasonal or temporary financing. • On the other hand, securities with longer-term maturities are sold in Capital markets. The key capital market securities are bonds (long-term debt) and both common stock and preferred stock (equity, or ownership).

3. Financial Institutions

Terms Defined Public offering - The sale of either bonds or stocks to the general public. Private placement - The sale of a new security directly to an investor or group of investors. Secondary market - Financial market in which preowned securities (those that are not new issues) are traded.

PY

• Classify Financial Markets into comparative groups: - Primary vs. Secondary Markets • To raise money, users of funds will go to a primary market to issue new securities (either debt or equity) through a public offering or a private placement. • The sale of new securities to the general public is referred to as a public offering and the first offering of stock is called an initial public offering. The sale of new securities to one investor or a group of investors (institutional investors) is referred to as a private placement. • However, suppliers of funds or the holders of the securities may decide to sell the securities that have previously been purchased. The sale of previously owned securities takes place in secondary markets. • The Philippine Stock Exchange (PSE) is both a primary and secondary market.

• Recall the definition of Financial institutions from the earlier discussion. • Identify examples of financial institutions: - Commercial Banks - Individuals deposit funds at commercial banks, which use the deposited funds to provide commercial loans to firms and personal loans to individuals, and purchase debt securities issued by firms or government agencies. - Insurance Companies - Individuals purchase insurance (life, property and casualty, and health) protection with insurance premiums. The insurance companies pool these payments and invest the proceeds in various securities until the funds are needed to pay off claims by policyholders. Because they often own large blocks of a firm’s stocks or bonds, they frequently attempt to 25


Money market - A financial relationship created between suppliers and users of short-term funds. Capital market - A market that enables suppliers and users of long-term funds to make transactions.

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C O

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influence the management of the firm to improve the firm’s performance, and ultimately, the performance of the securities they own. - Mutual Funds - Mutual funds are owned by investment companies which enable small investors to enjoy the benefits of investing in a diversified portfolio of securities purchased on their behalf by professional investment managers. When mutual funds use money from investors to invest in newly issued debt or equity securities, they finance new investment by firms. Conversely, when they invest in debt or equity securities already held by investors, they are transferring ownership of the securities among investors. - Pension Funds - Financial institutions that receive payments from employees and invest the proceeds on their behalf. - Other financial institutions include pension funds like Government Service Insurance System (GSIS) and Social Security System (SSS), unit investment trust fund (UITF), investment banks, and credit unions, among others.

Figure 2: How Financial Institutions Provide Financing for Firms (Gitman & Zutter, 2012)

• The figure above illustrates how the key financial institutions serve as intermediaries for suppliers and users of funds. • Ask the learners which type of financial institution do they think is most critical for firms?


ENRICHMENT (5 MINS) Integration of Learning • Question for reflection: How would you relate the role of financial managers, role of financial markets and role of investors? Role of Financial Markets

Financial managers make financing decisions that require funding from investors in the financial markets.

The financial markets provide a Investors provide the funds that are forum in which firms can issue to be used by financial managers to securities to obtain the funds that finance corporate growth. they need and in which investors can purchase securities to invest their funds.

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EVALUATION (10 MINS) Quiz:

Role of Investors

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Role of Financial Managers

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Part 1: True/False 1. To achieve the goal of profit maximization for each alternative being considered, the financial manager would select the one that is expected to result in the highest monetary return. 2. Dividend payments change directly with changes in earnings per share. 3. The wealth of corporate owners is measured by the share price of the stock. 4. Financial markets are intermediaries that channel the savings of individuals, businesses, and government into loans or investments. 5. The money market involves trading of securities with maturities of one year or less while the capital market involves the buying and selling of securities with maturities of more than one year.


Teacher Tips You may use suggested format or take questions from the test banks found at the end of this file. Answer Key: Part 1: T, F, T, F, T Part 2: B, D, A, C, B

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3. The major securities traded in the capital markets are ____. A. stocks and bonds. B. bonds and commercial paper. C. commercial paper and Treasury bills. D. Treasury bills and certificates of deposit.

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2. Firms that require funds from external sources can obtain them from _____. A. financial markets. B. private placement. C. financial institutions. D. All of the above.

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Part 2: Multiple Choice 1. The ______ is created by a financial relationship between suppliers and users of short-term funds. A. financial market B. money market C. stock market D. capital market

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4. The primary goal of the financial manager is _____. A. minimizing risk. B. maximizing profit. C. maximizing wealth. D. minimizing return.

5. A financial manager must choose between four alternative Assets: 1, 2, 3, and 4. Each asset costs $35,000 and is expected to provide earnings over a three-year period as described below. Asset

Year 1

Year 2

Year 3

1 $ 21,000 $ 15,000 $ 6,000 2 $ 9,000

$ 15,000 $ 21,000

3 $ 3,000

$ 20,000 $ 19,000

4 $ 6,000

$ 12,000 $ 12,000


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Based on the profit maximization goal, the financial manager would choose _____. A. Asset 1. B. Asset 2. C. Asset 3. D. Asset 4. Appendix

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Test Bank - Goal of the Firm (Gitman & Zutter, 2012)

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True/False 1. High cash flow is generally associated with a higher share price whereas higher risk tends to result in a lower share price. 2. When considering each financial decision alternative or possible action in terms of its impact on the share price of the firm's stock, financial managers should accept only those actions that are expected to increase the firm's profitability. 3. To achieve the goal of profit maximization for each alternative being considered, the financial manager would select the one that is expected to result in the highest monetary return. 4. Dividend payments change directly with changes in earnings per share. 5. The wealth of corporate owners is measured by the share price of the stock. 6. Risk and the magnitude and timing of cash flows are the key determinants of share price, which represents the wealth of the owners in the firm. 7. _When considering each financial decision alternative or possible action in terms of its impact on the share price of the firm's stock, financial managers should accept only those actions that are expected to maximize shareholder value. 8. An increase in firm risk tends to result in a higher share price since the stockholder must be compensated for the greater risk. 9. Stockholders expect to earn higher rates of return on investments of lower risk and lower rates of return on investments of higher risk.


Answer Key True/False 1. T 2. F 3. T 4. F 5. T 6. T 7. T 8. F 9. F

Multiple Choice 1. C 2. B 3. C 4. D 5. C 6. A 7. C 8. B 9. B 10. B 11. A 12. D 13. B 14. A

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3. The wealth of the owners of a corporation is represented by A. profits. B. earnings per share. C. share value. D. cash flow.

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2. Corporate owner's receive realizable return through A. earnings per share and cash dividends. B. increase in share price and cash dividends. C. increase in share price and earnings per share. D. profit and earnings per share.

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Multiple Choice 1. The primary goal of the financial manager is A. minimizing risk. B. maximizing profit. C. maximizing wealth. D. minimizing return.

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4. Wealth maximization as the goal of the firm implies enhancing the wealth of A. the Board of Directors. B. the firm's employees. C. the federal government. D. the firm's stockholders. 5. The goal of profit maximization would result in priority for A. cash flows available to stockholders. B. risk of the investment. C. earnings per share. D. timing of the returns. 6. Profit maximization as a goal is not ideal because it does NOT directly consider A. risk and cash flow. B. cash flow and stock price. 30


8. Profit maximization fails because it ignores all EXCEPT A. the timing of returns. B. earnings per share. C. cash flows available to stockholders. D. risk.

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7. Profit maximization as the goal of the firm is not ideal because A. profits are only accounting measures. B. cash flows are more representative of financial strength. C. profit maximization does not consider risk. D. profits today are less desirable than profits earned in future years.

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C. risk and EPS. D. EPS and stock price.

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9. The key variables in the owner wealth maximization process are A. earnings per share and risk. B. cash flows and risk. C. earnings per share and share price. D. profits and risk.

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10. Cash flow and risk are the key determinants in share price. Increased cash flow results in ________, other things remaining the same. A. a lower share price B. a higher share price C. an unchanged share price D. an undetermined share price 11. Cash flow and risk are the key determinants in share price. Increased risk, other things remaining the same, results in A. a lower share price. B. a higher share price. C. an unchanged share price. D. an undetermined share price.


12. Financial managers evaluating decision alternatives or potential actions must consider A. only risk. B. only return. C. both risk and return. D. risk, return, and the impact on share price.

Based on the profit maximization goal, the financial manager would choose Year 2

Year 3

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Asset Year 1

1 $ 21,000 $ 15,000 $ 6,000 $ 15,000 $ 21,000

3 $ 3,000

$ 20,000 $ 19,000

4 $ 6,000

$ 12,000 $ 12,000

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Asset 1. Asset 2. Asset 3. Asset 4.

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A. B. C. D.

2 $ 9,000

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13. A financial manager must choose between four alternative Assets: 1, 2, 3, and 4. Each asset costs $35,000 and is expected to provide earnings over a three-year period as described below.

14. A financial manager must choose between three alternative investments. Each asset is expected to provide earnings over a three-year period as described below. Based on the wealth maximization goal, the financial manager would Asset Year 1

Year 2

1 $ 21,000 $ 9,000

Year 3

$ 15,000

2 $ 15,000 $ 15,000 $ 15,000 3 $ 9,000

$ 21,000 $ 15,000

$ 45,000 $ 45,000 $ 45,000


A. B. C. D.

choose Asset 1. choose Asset 2. choose Asset 3. be indifferent between Asset 1 and Asset 2.

Test Bank - Financial Markets, Financial Institutions, Financial Instruments (Gitman & Zutter, 2012)

True/False 1. F 2. F 3. T 4. T 5. F 6. F 7. F 8. T 9. F

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True/False 1. Primary and secondary markets are markets for short-term and long-term securities, respectively. 2. Financial markets are intermediaries that channel the savings of individuals, businesses, and government into loans or investments. 3. The money market involves trading of securities with maturities of one year or less while the capital market involves the buying and selling of securities with maturities of more than one year. 4. Holders of equity have claims on both income and assets that are secondary to the claims of creditors. 5. Preferred stock is a special form of stock having a fixed periodic dividend that must be paid prior to payment of any interest to outstanding bonds. 6. Commercial banks obtain most of their funds from borrowing in the capital markets. 7. Credit unions are the largest type of financial intermediary handling individual savings. 8. A mutual fund is a type of financial intermediary that obtains funds through the sale of shares and uses the proceeds to acquire bonds and stocks issued by various business and governmental units. 9. IPO stands for Interest and Principal Obligation.

Answer Key

Multiple Choice 1. A ______ is one financial intermediary handling individual savings. It receives premium payments that are placed in loans or investments to accumulate funds to cover future benefits. A. life insurance company B. commercial bank C. savings bank D. credit union


Multiple Choice 1. A 2. A 3. B 4. B 5. A 6. C 7. A 8. D 9. D 10. B 11. D 12. A 13. A

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3. Which of the following is not a financial institution? A. A pension fund B. A newspaper publisher C. A commercial bank D. An insurance company

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2. The key participants in financial transactions are individuals, businesses, and governments. Individuals are net ______ of funds, and businesses are net ______ of funds. A. suppliers; users B. purchasers; sellers C. users; suppliers D. users; providers

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4. A ______ is set up so that employees of corporations or governments can receive income after retirement. A. life insurance company B. pension fund C. savings bank D. credit union

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5. A ______ is a type of financial intermediary that pools savings of individuals and makes them available to business and government users. Funds are obtained through the sale of shares. A. mutual fund B. savings and loans C. savings bank D. credit union 6. Most businesses raise money by selling their securities in a. A. a direct placement. B. a stock exchange. C. a public offering. D. a private placement.


7. Which of the following is not a service provided by financial institutions? A. Buying the businesses of customers B. Investing customers’ savings in stocks and bonds C. Paying savers’ interest on deposited funds D. Lending money to customers

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8. Government usually A. borrows funds directly from financial institutions. B. maintains permanent deposits with financial institutions. C. is a net supplier of funds. D. is a net demander of funds.

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9. By definition, the money market involves the buying and selling of A. funds that mature in more than one year. B. flows of funds. C. stocks and bonds. D. short-term funds.

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10. The ______ is created by a financial relationship between suppliers and users of short-term funds. A. financial market B. money market C. stock market D. capital market 11. Firms that require funds from external sources can obtain them from A. financial markets. B. private placement. C. financial institutions. D. All of the above.


12. The major securities traded in the capital markets are A. stocks and bonds. B. bonds and commercial paper. C. commercial paper and Treasury bills. D. Treasury bills and certificates of deposit.

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13. Long-term debt instruments used by both government and business are known as A. bonds. B. equities. C. stocks. D. bills.


Business'Finance

180 MINS

Review of Financial Statement Preparation, Analysis, LESSON OUTLINE and Interpretation Pt.1 Motivation

20

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10

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Content Standards The learners demonstrate an understanding of the process of preparing financial statements as well as the methods or tools of analysis of financial statements, including horizontal analysis, vertical analysis, and financial ratios to test the level of liquidity, solvency, profitability, and stability of the business.

Introduction Brief introduction on learning objectives

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Performance Standards The learners will be able to solve exercises and problems that require financial statement preparation, analysis, and interpretation using horizontal and vertical analyses, and various financial ratios.

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Learning Competencies The learners shall be able to prepare financial statements (ABM_BF12-III-6) Specific Learning Outcomes At the end of this lesson, the learners will be able to identify and explain the basic steps in the accounting process (accounting cycle).

Matching type exercise as an ice breaker

Instruction/ Discussion Delivery

90

Practice

Board work/exercises and presentation

30

Evaluation

Quiz

30

Materials

calculators, laptops

Resources (1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex Bookstore. (2) Valencia and Roxas. Basic Accounting. (3) Copies of sample financial statements


INTRODUCTION/REVIEW (10 MINS) Communicate learning objectives

MOTIVATION (20 MINS)

Match the letter with the definition that corresponds to the following terms: (Modified from Basic Accounting, Valencia & Roxas)

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A. Exchanges of goods or services between/among two or more entities or some other event having an economic impact on a business enterprise. B. An accounting record used to list a particular type of frequently recurring transaction. C. A record used to classify and summarize the effects of transactions. D. An entry on the right side of an account. E. A record used as the basis for analyzing and recording transactions. Examples include invoices, check stubs, and receipts. F. A collection of accounts maintained by a business. G. Procedures used for analyzing, recording, classifying, and summarizing the information to be presented in accounting reports. H. An entry on the left side of an account. I. Procedures and methods used, including data processing equipment, to collect and report accounting data. J. An accounting record used to record all business activities for which a special journal is not maintained. K. The process of summarizing transactions by transferring amounts from the journals to the ledger accounts. L. The grouping of supporting accounts that in total equal the balance of a control account in the general ledger. M. The general ledger account that summarizes the detailed information in a subsidiary ledger.

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1. Accounting System 2. Debit 3. Credit 4. Transactions 5. Double-Entry Accounting 6. Journal Entry 7. Journals 8. Accounting Process (or cycle) 9. Special Journals 10. General Journal 11. Account 12. Ledger 13. Posting 14. General Ledger 15. Subsidiary Ledgers

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• Introduce the following learning objectives using any of the suggested protocols (verbatim, own words, read-aloud): - I will be able to identify and explain the basic steps in the accounting process (accounting cycle).

38


Teacher Tips Answer Key 1. i 2. h 3. d 4. a 5. o 6. q 7. p 8. g 9. b 10. j 11. c 12. f 13. k 14. n 15. l

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N. A collection of all the accounts used by a business that could appear on the financial statements. O. A system of recording transactions in a way that maintains the equality of the accounting equation. P. Records in which transactions are first entered, providing a chronological record of business activity. Q. The recording of a transaction in which debits equal credits. It usually includes a date and an explanation of the transaction.

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INSTRUCTION/DELIVERY (90 MINS)

1. The Accounting Equation The basic accounting equation is:

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Discuss the following: Accounting is the systematic and comprehensive recording of financial transactions pertaining to a business. (Investopedia - Sharper Insight. Smarter Investing. | Investopedia. (2016). Investopedia. Retrieved 8 May 2016, from http://investopedia.com)

ASSETS = LIABILITIES + OWNER’S EQUITY

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• This means that the whole assets of the company comes from the liability, or debt of the company, and from the capital of the owner of the business, and the income it generated from the business operations. This reflects the double-entry bookkeeping, and shown in the balance sheet. • Double entry bookkeeping tells us that if we add something from the one side, which is asset, we must add the same amount to the other side to keep them in balance. • For example, if we were to increase cash (an asset) we might have to increase note payable (a liability account) so that the basic accounting equation remains in balance. ASSETS P 500.00

=

LIABILITIES

+ OWNER’S EQUITY

P 500.00 39


• In double-entry bookkeeping, there is the concept of debit (dr) and credit (cr). Debit is the left, and credit is the right. • There is also a concept of normal balances. A normal balance, either a debit normal balance or a credit normal balance, is the side where a specific account increases.

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• In the accounting equation, asset is on the left side, while liabilities and equity is on the right side. Therefore, asset has a debit normal balance, meaning that cash as an asset is debited to increase, while credited to decrease.

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• On the other hand, liabilities and owners’ equity have a credit normal balance. This means that a liability account is credited to increase, while debited to decrease. The accounting equation provides the foundation for what eventually becomes the balance sheet. 2. T-Account Analysis In double-entry bookkeeping, the terms debit and credit are used to identify which side of the ledger account an entry is to be made. Debits are on the left side of the ledger and Credits are on the right side of the ledger. It does not matter what type of account is involved.

DEBIT (DR) Php 500.00

ACCOUNTS PAYABLE CREDIT (CR)

DEBIT (DR)

CREDIT (CR)

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CASH

Php 500.00

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• The debit to cash increases the Cash Account by PHP500 while the credit to Accounts Payable increases this liability account by the same PHP500. • In the above example, we analyzed the accounting equation in terms of assets, liabilities, and owners’ equity. These are called Real or Permanent Accounts. These accounts remain open and active for the life of the enterprise. • In contrast, there are accounts that reflect activities for a specific accounting period. These are called Nominal or Temporary Accounts. After the end of the specific period and the start of a new period, the balance of the nominal accounts are zero. • Using the accounting equation, we can now expand the analysis that will include both real and nominal accounts. All nominal accounts will be then closed to a Retained Earnings account at the end of the period, which is an owner’s equity account. 40 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

CASH A

PHP35,000

B

PHP1,800

C

ACCOUNTS RECEIVABLE

ACCOUNTS PAYABLE

OWNER’S EQUITY CALVO, CAPITAL PHP35,000

PHP1,800 PHP11,250

PHP6,740

SERVICE REVENUE

PHP11,250

PHP6,740

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D

= LIABILITIES +

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ASSETS

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Illustrative Example: Calvo Delivery Service is owned and operated by Noel Calvo. The following selected transactions were completed by Calvo Delivery Service during February: A. Received cash from owner as additional investment, P35,000. B. Paid creditors on account, P1,800. C. Billed customers for delivery services on account, P11,250. D. Received cash from customers on account, P6,740.

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3. Nominal Accounts There are two major categories of nominal accounts: Expense and Revenue accounts. • Expense Accounts - A resource, when not yet used up for the current period, is considered an Asset and will provide benefits at a future time. - On the other hand, a resource that has been used for the current period is called an Expense. At the end of each accounting period, expenses are closed out to the Retained Earnings Account which decreases the Owners’ Equity. Since expenses decrease the owners’ equity, those expense accounts carry a normal debit balance. • Revenue Accounts - Revenue Accounts reflect the accumulation of potential additions to retained earnings during the current accounting period. - At the end of the accounting period accumulation of revenues during the period are closed to the Retained Earnings Account which increases Owners’ Equity. - Therefore revenue accounts carry a normal credit balance meaning the same balance as the Retained Earnings Account.


ASSETS

1

PHP35,000

2

PHP3,000

2

PHP1,800

6

ACCOUNTS RECEIVABLE

OFFICE EQUIPMENT

PHP1,200

27

PHP500

30

PHP180

31

PHP315

ACCOUNTS PAYABLE

OWNER’S EQUITY

SERVICE REVENUE

EXPENSES

PHP35,000

PHP12,300

15

+

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CASH

LIABILITIES

PHP3,000 PHP1,800

PHP12,300

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MAR

=

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Illustrative Example: J. F. Outz, M.D., has been a practicing cardiologist for three years. During April 2009, Outz completed the following transactions in her practice of cardiology: Mar 1 Provide medical services to clients for cash P35,000. Mar 2 Paid rent for the month, P3,000. Paid advertising expense, P1,800. Mar 6 Purchased office equipment on account, P12,300. Mar 15 Paid creditor on account, P1,200. Mar 27 Paid cash for repairs to office equipment, P500. Mar 30 Paid telephone bill for the month, P180. Mar 31 Paid electricity bill for the month, P315.

PHP1,200

PHP500 PHP180 PHP315


If journalized: March

1 Debit Cash for PHP35,000; Credit Service Revenue for PHP35,000 2 Debit Rent Expense for PHP3,000; credit Cash for PHP3,000 2 Debit Advertising Expense for PHP1,800; Credit Cash for PHP1,800

15 Debit Accounts Payable for PHP1,200; Credit Cash for PHP1,200 27 Debit Repairs Expense for PHP500; credit Cash for PHP500

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6 Debit Office Equipment for PHP12,300; Credit Accounts Payable for PHP12,300

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30 Debit Utilities Expense (or telephone) for PHP180; Credit Cash for PHP180 31 Debit Utilities Expense (or energy) for PHP315; credit Cash for PHP315

4. The Accounting Cycle

The Process:

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• Because accounting is all about getting data and putting them into the accounting equation, the end products are financial statements such as a balance sheet and income statements, the process of accounting follows a cycle called the Accounting Cycle. • It starts with the identification of whether a transaction is accountable or can be quantified, and ends with a post-closing trial balance.

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Step 1: Analyze Business Transactions. • In this step, a transaction is analyzed to find out if it affects the company and if it needs to be recorded. • Personal transactions of the owners and managers that do not affect the company should not be recorded. • In this step, a decision may have to be made to identify if a transaction needs to be recorded in special journals such as a sales or purchases journal. Therefore, what you should do is: A. Carefully read the description of the transaction to determine whether an asset, a liability, an owner’s equity, a revenue, an expense, or a drawing account is affected. B. For each account affected by the transaction, determine whether the account increases or decreases. C. Determine whether each increase or decrease should be recorded as a debit or a credit, following the rules of debit and credit. 43 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Illustrative Example: • N. Juna resigned from Company X. This does not affect any asset, liability, or the owner’s equity account. • B. Cano purchased PHP500 cash worth of supplies at Ace Hardware. This affects cash and supplies, both asset accounts.

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Step 2: Record This in the Journal. • Using the rules of debit and credit, transactions are initially entered in a record called a Journal and the entry made is called a Journal Entry. • The journal serves as a record of when transactions occurred and were recorded. • For repetitive transactions or high volume transactions (e.g. one thousand sales transactions in one day), Special Journals are made. These special journals include sales journal, purchases journal, cash receipts journal, and cash disbursements journal.

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The Source Document is the file or document (i.e. official receipt, purchase order, contract) that will provide a basis or reason for a journal entry. For example, an official receipt issued by the business will tell you that a sale transaction occurred and will be reflected by the journal entry.

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Illustrative Example: • M. Jaya resigned from Company X. No journal entry. • C. Danto purchased PHP500 cash worth of supplies to Ace Hardware. Debit Supplies PHP500, Credit Cash PHP500.

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Step 3: Post the Transactions on a Ledger. • A transaction is first recorded in a journal. Periodically, the journal entries are transferred to the accounts in the ledger. • The process of transferring the debits and credits from the journal entries to the accounts is called Posting. • Ledgers provide chronological details as to how transactions affect individual accounts. There are two types of ledgers: the General Ledger and Subsidiary Ledger. The general ledger is a summary of the different Subsidiary Ledgers and can serve as a control account. • For example, a general ledger for accounts receivable summarizes the balances found in the different subsidiary ledgers for different customers. Illustrative Example: J. Gaya, a CPA, is an independent auditor with only two clients. The Accounts Receivable ledger account has a balance of PHP100,000. His two clients are A. Rania, and X. Campos. The subsidiary ledger of A. Rania has a balance of PHP25,000. X. Campos’s ledger balance is PHP75,000. The sum of subsidiary ledgers must total the general ledger or else there must be an investigation to identify the source of discrepancies. ACCOUNTS RECEIVABLE DATE December 31, 2015

Bal. Php 100,000

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Subsidiary Ledgers A. RANIA DATE December 31, 2015

X. CAMPOS DATE

Bal. Php 25,000

December 31, 2015

Bal. Php 75,000

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Posting in the subsidiary ledgers can be done anytime and the balances are summarized at the end of an accounting period. Posting in the general ledger is done at the end of an accounting period.

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Step 4: Prepare an Unadjusted Trial Balance. • Errors may occur in posting debits and credits from the journal to the ledger. One way to detect such errors is by preparing a trial balance. • Double-entry accounting requires that debits must always equal credits. The trial balance verifies this equality. • The steps in preparing a trial balance are as follows: 1. List the name of the company, the title of the trial balance, and the date the trial balance is prepared. 2. List the accounts from the ledger and enter their debit or credit balance in the Debit or Credit column of the trial balance. 3. Total the Debit and Credit columns of the trial balance. 4. Verify that the total of the Debit column equals the total of the Credit column.

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Step 5: Make adjustments. Journalize adjusting entries. • At the end of the accounting period, many of the account balances in the ledger can be reported in the financial statements without change. • For example, the balances of the cash and land accounts are normally the amount reported on the balance sheet. However, some accounts in the ledger require updating. • This updating is required for the following reasons: 1. Some expenses are not recorded daily. For example, the daily use of supplies would require many entries with small amounts. Also, managers usually do not need to know the amount of supplies on hand on a day-to-day basis. 2. Some revenues and expenses are earned as time passes rather than as separate transactions. For example, rent received in advance (unearned rent) expires and becomes revenue with the passage of time. Likewise, prepaid insurance expires and becomes an expense with the passage of time. 3. Some revenues and expenses may be unrecorded. For example, a company may have provided services to customers that are has not billed or recorded at the end of the accounting period. Likewise, a company may not pay its employees until the next accounting period even though the employees have earned their wages in the current period. 45 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

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• The analysis and updating of accounts at the end of the period before the financial statements are prepared is called the Adjusting Process. The journal entries that bring the accounts up to date at the end of the accounting period are called Adjusting Entries. • The following are normally adjusted at the end of a period: - Accruals. These include unpaid salaries for the accounting period, unpaid interest expense, or unpaid utility expenses. - Prepayments. If a company has prepaid expenses such as prepaid rent or prepaid insurance then the correct balances for these accounts have to be established at the end of each accounting period to reflect their correct balances. - Depreciation and amortization expenses. Depreciation expenses are recognized at the end of each accounting period through adjusting entries. If there are intangible assets such as franchise, the allocation of their costs which is called amortization expense, is also recognized at the end of each accounting period through adjusting entries. - Allowance for uncollectible accounts. Bad debt expense from accounts receivable is also recognized through adjusting entries.

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Step 6: Prepare an Adjusted Trial Balance. An adjusted trial balance is prepared after taking into consideration the effects of the adjusting entries. Again, this is to ensure that the total debit balances equal the credit balances after posting and journalizing adjusting entries made.

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Step 7: Prepare the financial statements. From the adjusted trial balance, the financial statements can then be prepared. These are the statement of financial position, statement of profit or loss, and the statement of cash flows.

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Step 8: Make the closing entries. In the discussion about accounts, it was discussed that nominal accounts (revenue and expense accounts) are closed to retained earnings, or an owner’s capital account because these accounts refer only to a specific accounting period. Actually, these accounts to be closed are accounts that can be seen in the income statement. Upon closing: - If the revenues exceed expenses during an accounting period, retained earnings will increase. - The reverse is true which means that if the expenses exceed revenues, the retained earnings will decrease. In closing temporary accounts: - Revenue account balances are transferred to an account called Income Summary Account (sometimes profit or loss summary). - Expense account balances are also transferred to the Income Summary Account. - The balance of the Income Summary (net income or net loss) is transferred to the owner’s capital account. - The balance of the owner’s drawing account is transferred to the owner’s capital account. 46 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Step 9: Make a Post-Closing Trial Balance. A Post-Closing Trial Balance shows the accounts that are permanent or real. These are the accounts that can be seen in your balance sheet. The post-closing trial balance is prepared to test if the debit balances equal the credit balances after closing entries are considered.

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5. Basic Financial Statements. A financial statement is basically a summary of all transactions that are carefully recorded and transformed into meaningful information. It also shows the company’s permanent and temporary accounts. Basically, financial statements are comprised of the following:

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a. Income Statement • These are also known as the Profit/Loss Statement, Statement of Comprehensive Income, or Statement of Income. • This is a summary of the revenue and expenses of a business entity for a specific period of time, such as a month or a year.

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Figure 1: Sample Income Statement Source: Warren, Duchac, Fess. Accounting.

Statement of Owner’s Equity These are also known as the Statement of Changes in Equity. This reports the changes in the owner’s equity over a period of time. It is prepared after the income statement because the net income or net loss for the period must be reported in this statement. Similarly, it is prepared before the balance sheet since the amount of owner’s equity at the end of the period must be reported on the balance sheet. • Because of this, the statement of owner’s equity is often viewed as the connecting link between the income statement and balance sheet.

b. • • • •


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Figure 2: Sample Statement of Owner’s Equity Source: Warren, Duchac, Fess. Accounting

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c. Balance Sheet • Formerly known as the Statement of Financial Position. • This provides information regarding the liquidity position and capital structure of a company as of a given date. • It must be noted that the information found in this report are only true as of a given date. • It shows a list of the assets, liabilities, and owner’s equity of a business entity as of a specific date, usually at the close of the last day of a month or a year.

Figure 3: Sample Balance Sheet Source: Warren, Duchac, Fess. Accounting

d. Statement of Cash Flows • The statement of cash flows reports a company’s cash inflows and outflows for a period. 48 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

C O

PY

• This is used by managers in evaluating past operations and in planning future investing and financing activities. • It is also used by external users such as investors and creditors to assess a company’s profit potential and ability to pay its debt and pay dividends.

PRACTICE (30 MINS)

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Figure 4: Sample Statement of Cash Flows

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1. Using the following (scrambled) accounts, prepare a balance sheet for ABC, a retail company, for the year ending in December 31, 2014. Assume that these are the only Balance Sheet Accounts.


Accounts Payable

39,000

Accrued Expenses

8,000

Accumulated Depreciation

51,000

Additional Paid-In Capital

86,000

Balance Sheet ABC, Incorporated December 31, 2014

2,000

Cash

23,000

Gross accounts receivable

40,000

Allowance for doubtful accounts

(2,000)

PY

Allowance for Doubtful Accounts

Answer Key

23,000

Net accounts receivable

38,000

Common Stock (PHP0.20 par)

45,000

Inventories

54,000

Current assets

115,000

Gross fixed assets

486,000

Accumulated depreciation

(51,000)

Net fixed assets

435,000

Total assets

550,000

Short-term bank loan (notes payable)

18,000

Accounts payable

39,000

Accrued expenses

8,000

Current portion of L.T. Debt

6,000

Current liabilities

71,000

Long term debt

210,000

Total liabilities

281,000

Common stock (P0.20 par)

45,000

Additional paid-in capital

86,000

Retained earnings

138,000

Total liabilities and equity

550,000

Current Portion of L.T. Debt

6,000

Gross Accounts Receivable

40,000

Gross Fixed Assets

C O

Cash

486,000

Inventories

54,000

38,000

Net Accounts Receivable

435,000

Retained Earnings

138,000

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Net Fixed Assets

ED

210,000

Long-Term Debt

Short-Term Bank Loan (Notes Payable)

18,000

50


2. Prepare a multi-step income statement for the retail company, ABC, for the year ending December 31, 2014 given the information below:

Income Statement The ABC Company For the 12 month period Ending December 31, 2014

68,000

Answer Key

Beginning inventory

256,000

Depreciation

78,000

Net sales

3,162,000

Ending inventory

248,000

Cost of goods sold

2,433,000

Gross Sales

3,210,000

Gross profit

729,000

Interest expense

64,000

Operating expenses (excluding depreciation)

417,000

Lease payments

52,000

Depreciation

78,000

Management salaries

240,000

Operating profit

234,000

Materials purchases

2,425,000

Interest expense

64,000

R&D expenditures

35,000

Earnings before taxes

170,000

Repairs and maintenance costs

22,000

Returns and allowances

48,000

Taxes

51,000

ED

C O

PY

Advertising expenditures

51,000

Net income

119,000

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Taxes


EVALUATION (30 MINS) Teacher Tip: Answer Key 1. a. BS b. BS c. BS d. IS e. IS f. BS g. BS

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PY

1. Indicate whether the following items would appear on the income statement (IS), or balance sheet (BS). A. ________ Office Supplies B. ________ Accounts Payable C. ________ Computer Equipment D. ________ Commission Fees Earned E. ________ Salaries Expense F. ________ B. So, Capital G. ________ Accounts Receivable

2. Using the following accounts from the retail store, A-Mart Incorporated’s income statement for the year ending in December 31, 2013, answer the questions below. Note that all figures are in millions. Cost of goods sold

30

Advertising

20

Taxes

35

Repairs and maintenance expenses

40

Management salaries Net sales Depreciation

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Lease payments

ED

PHP600

100

1,000 60

A. A-Mart’s gross profit is PHP___________________. B. A-Mart’s operating profit is PHP___________________. C. A-Mart’s net profit is PHP___________________.


2. a. PHP 400 b. 150 c. 115

3. Using the following accounts from the A-Mart, Incorporated’s balance sheet for the year ending December 31, 2013, answer the questions below. Use cash as a plug figure. Note that all figures are in millions. PHP 60

Current portion of L.T. Debt

300

Leasehold improvements Accrued expenses

200

Gross fixed assets

900

Accounts payable

90

Inventories

190

Common stock (PHP1.00 par)

400 20 100

Long-term bank loan

600

Retained earnings

200

Cash

???

A. B. C. D. E.

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Net accounts receivable

ED

Short-term bank loan

C O


Answer Key 3. a. PHP 410 b. 210 c. 1,410 d. 810 e. 600

PY

40

Teacher Tip:

A-Mart’s current assets are PHP___________________. A-Mart’s current liabilities are PHP___________________. A-Mart’s total assets are PHP___________________. A-Mart’s total liabilities are PHP____________________. A-Mart’s total stockholder’s equity is PHP___________________.


Business Finance

Review of Financial Statement Preparation, Analysis, LESSON OUTLINE and Interpretation Pt.2

15

Case Analysis

45

PY

Introduction Introduce the learning objectives and /Review

review financial ratios, focusing on liquidity and efficiency ratios. Introduce the case study.

C O


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Learning Competencies The learners shall be able to:

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• Define the measurement levels namely, liquidity, solvency, stability, and profitability (ABM_BF12-IIIb-7) • Compute, analyze, and interpret financial ratios such as current ratio, Review of Financial Statement Preparation, Analysis, and Interpretation

120MINS

Ask learners to analyze and discuss the case in groups.

Presentation Ask assigned groups to present their case analysis to the whole class.

Enrichment Discuss important points of the case and and provides commentaries to the groups’ Summary analysis

Materials

• Calculators • Laptops • Projectors • Textbook

Resources (1) Several copies of case to distribute to learner-groups

Specific Learning Outcomes At the end of this lesson, the learners will be able to: • Apply their knowledge on liquidity and efficiency ratios in tackling real life business problems. • Pinpoint business problems and formulate relevant recommendations and strategies. 54 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

30 30

PRE-WORK

PY

Provide copies of the financial statement of the subject company to the learners a day before the class. Ask them to compute for liquidity and efficiency ratios.

INTRODUCTION/REVIEW (15 MINS)

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1. Review profitability and leverage ratios. Ask learners what profitability and leverage mean. Write the names of the different types of ratios and their formulas on the board. 2. Explain that business cases are used to discuss certain issues and problems of a specific company. Learners will take the point-of-view of owners/managers in analyzing the case. 3. Discuss the mechanics of the case discussion:

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• The class will be divided in groups of 4 to 6 learners. • Learners will discuss and analyze the business case among their groups. They will then need to summarize their analysis in an essay/paper. The paper will have the following outline: Case Background/Story, Analysis (including computations), and Recommendation. The paper can be one to two pages of yellow sheet or bond paper. They must do this within 45 minutes. • Two groups will be asked to present. Presenting groups do not need to submit an essay/paper. Instead, they need to prepare their presentation with materials like manila paper, transparencies, or PowerPoint. Groups can volunteer or the teacher can also assign who will present. Assignments should be finalized before learners start their case analysis. • Presentation time is 10 minutes for each group. After the presentation, there will be a 5-minute Q&A session. 4. Distribute the printed cases to the learners.


CASE ANALYSIS (60 MINS) 1. Allow the learners to break into groups. From time to time, update them with the remaining time to do the analysis and their essay/ presentation.

PY

2. Make sure to remind them that they will take on the shoes of the owner/manager in solving the case. Below is the business case. You may look for or make another business case as long as it highlights the same topics. Zapatoes, Inc

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Anthony Cruz owns Zapatoes, Inc., a home-grown Filipino shoe company. His company has experienced tremendous growth since it has started its operations in 2009. With a growing demand for his products, Anthony Cruz is considering expanding his operations by opening his first production facility. Currently, he pays another company to manufacture the shoes he designs. He is contemplating to produce the shoes Zapatoes, Inc. facility, with the hope of lowering the cost of production.

ED

The company needs PHP10 million to finance this expansion and is at a tight cash position. Anthony Cruz is now wondering where to get the funds needed – invite an investor or personally borrow from a bank?

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Here are the comparative financial statements of Zapatoes, Inc.:


Statement of Financial Position 2014

2013

180,000.00

210,000.00

270,000.00

Accounts Receivable

7,800,000.00

5,400,000.00

3,900,000.00

Inventory

3,400,000.00

3,000,000.00

2,000,000.00

11,380,000.00

8,610,000.00

6,170,000.00

2,000,000.00

1,800,000.00

1,000,000.00

400,000.00

400,000.00

-

2,000,000.00

2,000,000.00

2,000,000.00

4,400,000.00

4,200,000.00

3,000,000.00

200,000.00

200,000.00

200,000.00

6,780,000.00

4,210,000.00

2,970,000.00

Accounts Payable Short-term Loans Payable Long-term debt Total Liabilities Capital Stock Accumulated Profit Total Equity TOTAL EQUITY AND LIABILITIES

6,980,000.00

4,410,000.00

3,170,000.00

11,380,000.00

8,610,000.00

6,170,000.00

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Statement of Financial Performance

2015

Sales Cost of Goods Sold Operating Expenses Operating Income Interest Expense

2014

2013

9,219,747.90

6,856,235.83 5,040,300.00

2,950,319.33

2,536,807.26 1,915,314.00

2,350,000.00

2,300,000.00 2,100,000.00

3,919,428.57

2,019,428.57 1,024,986.00

248,000.00

Net Income before Taxes

3,671,428.57

Taxes

1,101,428.57

NET INCOME

C O

TOTAL ASSETS

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Cash

PY

2015

248,000.00

-

1,771,428.57 1,024,986.00 531,428.57 57

307,495.80


2,570,000.00

1,240,000.00

717,490.20

Zapatoes, Inc. sold 3,300 pairs on 2013, 4,500 pairs on 2014, and 6,200 pairs in 2015. With the brand’s target market – young professionals and college students, it can only sell it at the PHP1,000 to PHP2,000 price range per pair.

PY

Anthony is wondering whether owning his own manufacturing facility can really improve its profitability. Currently, he is producing his shoes at PHP475 pesos per pair. He expects that he can lower production costs to as much as PHP300 per pair if he will manufacture it himself. However, opening a new production facility will increase operating expenses (including depreciation) by 30%. Currently, most of his operating expenses are marketing and distribution costs.

C O

To finance the PHP10 million facility, he has three options: • Accept a PHP10 million equity investment from his friend, Alex. Alex will hold 45% percent ownership of the business afterwards. Alex does not demand any specific return. • Short-term loan for 1 year for PHP10 million at 6% per annum from Shortime Bank. • Long-term loan for 5 years for PHP10 million at 10% per annum from Longly Bank.

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PRESENTATION (30 MINS)

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Anthony is very confident that his sales volume will still grow for the next 5 years. However, his confidence is tainted by his uncertainties over the impact of opening a new production facility. What must he do?

1. Time each presentation. Ask groups to stop presenting after 10 minutes. Be strict with the time. 2. After each presentation, ask the presenting group some questions or clarifications. You can also challenge the computations/ recommendations of the learners. You may also provide general comments of the presentation flow and aesthetics. Ask other groups to also provide comments and questions to the presentations. This should take 5 minutes.


ENRICHMENT AND SUMMARY (15 MINUTES)

Teacher Tip:

1. Write on the board the main points raised by the presenting groups. 2. Provide your own analysis.

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ED

C O

PY

• Start by pinpointing the main issues relevant to the case. • Provide the correct figures for the profitability and leverage ratios. • Discuss how you arrive at your decision. Highlight important recommendations/changes that must be done to the operations of Zapatoes, Inc.

Guide Questions: 1. What is the Zapatoes Inc’s capital structure? What is the effect of an additional debt? Additional equity? 2. Assess the profitability of Zapatoes Inc’s. What is the effect of issuing debt to its profitability? Effect of equity? 3. What factors are considered in deciding whether to take long-term or short-term financing? 4. What financing should Anthony Cruz take?


Business Finance


120MINS

20

Motivation

10

PY

Introduction Brief review of the contents of a financial /Review statement and introduce the four types of financial ratios.

C O


ED


D EP


Discuss stories about households borrowing from a sari-sari store.

Instruction/ Define liquidity ratios and solve sample Delivery

30

Practice


20

Enrichment Analyze and interpret liquidity ratios for

20

problems.

various companies from different industries.

Evaluation

Additional exercises

Materials


Resources • Define the measurement levels, namely, liquidity, solvency, stability, and (1) Copies of sample financial statements profitability. (ABM_BF12-IIIb-7) • Compute, analyze, and interpret financial ratios such as current ratio, working capital, gross profit ratio, net profit ratio, receivable turnover, inventory turnover, debt-to- equity ratio, and the like. (ABM_BF12-IIIb-9)

Specific Learning Outcomes At the end of the lesson, the learners will be able to: • Define liquidity • Solve liquidity ratios (current and quick) 60 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

20

• Analyze, interpret, and compare the liquidity ratios of sample companies

INTRODUCTION/REVIEW (20 MINS) 1. Communicate learning objectives Introduce the following learning objectives using any of the suggested protocols (verbatim, own word, read-aloud): Introduce financial ratios

•

Define liquidity

•

Solve for liquidity ratios (current and quick)

•

Analyze, interpret, and compare the liquidity ratios of sample Philippine companies

2. Review

Ask learners what the contents are of the financial statements. Ask them how the contents of the financial statements are classified. Ask them what they remember about current and non-current classifications for assets and liabilities. Emphasize what accounts are considered current assets and liabilities.


Ask them if they have tried buying from sari-sari stores on credit. Ask them what the implications are if you or your household don’t pay your obligations to your neighbor’s sari-sari store. Write their answers on the board. Ask them, if a business does not pay its obligations on time, will it also have the same experiences like the household not paying its obligations? What could possibly happen to the business? Short-run? Long-run?

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1. 2. 3. 4.

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• • • •

PY

•

C O

•


INSTRUCTION/DELIVERY (30 MINS) 1. Introduce the four main categories of financial ratios: Liquidity Profitability Efficiency Leverage

•

Ask them what the uses of financial ratios are. Say that for this session we will just focus on liquidity.

PY

• • • •

C O

2. Define liquidity.

• Liquidity refers to the company’s ability to satisfy its short-term obligations as they come due. Refer back to the household example to emphasize the meaning of liquidity.

Current Ratio =

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3. Define the types of liquidity ratios and write the formulas on the board. Current ratio and quick ratio.

Emphasize the accounts needed in solving the ratios. Note that accounts receivable can have a non-current portion. Make sure it is removed from the current portion in computing the liquidity ratios. Marketable securities are short-term investments. Add that for receivables to be considered current, they should be collected within a year. Cite that property developers can be examples of companies which can have accounts receivable-trade beyond one year.

Current Assets

Current Liabilities

Cash + Marketable Securities + Accounts Receivable

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Quick Ratio =

Teacher Tip:

Current Liabilities

4. Show a sample financial statement and ask the learners to compute for the ratios:

Answer Key: Current ratio: 2.64 Quick ratio: 1.60


Sample Company Statement of Financial Position as of December 31, 2014 Assets

Liabilities and Stockholders’ Equity P 120,000.00

Accounts Payable

P 70,000.00

Marketable Securities

P 35,000.00

Short-term notes

P 55,000.00

Accounts receivable

P 45,000.00

Inventories

P 130,000.00 Current assets

Current liabilities Long-term debt

P 2,700,000.00

Total liabilities

P 330,000.00 P 2,970,000.00

Common stock

Buildings

P 1,600,000.00

Retained earnings

P 2,825,000.00 P 500,000.00

C O

Equipment

P 125,000.00

PY

Cash

P 1,575,000.00

P 4,570,000.00

Stockholders’ equity

P 2,075,000.00

Total Assets

P 4,900,000.00


P 4,900,000.00

PRACTICE (20 MINUTES)

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Provide exercises. Here are sample questions:

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Fixed Assets

• Current assets is PHP2,000, current liabilities is PHP3,500. What is current ratio? • Inventory is PHP150. Accounts payable is PHP450. Cash and accounts receivable total PHP800. What is the current ratio? Quick ratio? • If current ratio is 1.7, what is the total accounts receivable if cash is PHP20,000, inventory is PHP7,500, and accounts payable is PHP30,000. • Cash is 30% of total current assets. If current ratio is 2.3, what is the new current ratio if total non-cash current assets grow by 50%?


Teacher Tip: By this time, the learners should’ve mastered the computation of liquidity ratios.

Answer Key: • Current ratio: 2,000/3,500 = 0.57 • Current ratio: (800 + 150)/450 = 2.11 Quick ratio: 800/450 = 1.78 • Total receivables: 1.7= (X+20,000+7500)/ 30,000 = 23,500 • Current ratio: 2.3 = (6,900 + 16,100)/ 10,000 Assuming an increase in noncurrent assets of 50% New current ratio:(6,900 + 24,150)/ 10,000 = 3.105 Use hypothetical numbers to compute.

ENRICHMENT (20 MINUTES)

Teacher Tip:

1. Summarize and recap the relationship of the accounts in computing the ratios. 2. Ask the learners to discuss what they think the ratios mean and their applications may be. Some reflection questions:

PY

What is a good current ratio? 1? 2? 0.5? Can a current ratio be lower than the quick ratio? Is a high current ratio always good? Is a low current ratio always bad? What factors affect company’s decisions in managing current ratio? If company A has current ratio of 1.3 while company B has a current ratio of 2.3, which is a better company?

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• • • • •

A high current ratio is not necessarily good. Although a high current ratio would mean that there is a higher probability that the company can meet its short-term obligations, its assets may not be earning as much and the company may have given up long-term investment opportunities. High receivable balances increase liquidity ratios however, the collectability of these receivables might not be assured. Quality of receivables should also be considered in analyzing liquidity. This can be explained in the discussion of efficiency ratios where the average collection period is computed.

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3. Show the statement of financial position of three companies: Jollibee, Petron, and Globe. You may project the financial statements using LCD projector or overhead projector or provide printed copies. These financial statements can be used for the succeeding topics. You may also select other companies as examples. Just make sure to simplify and condense the financial reports before presenting them to class.

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Here are the condensed financial statements of the three companies as of December 31, 2014


Teacher Tip: Learners might give various answers to this question.

JFC

Petron

Globe

ASSETS Current assets 7,619

90.602

16,757

Receivables

7,621

17,927

23,543

Inventories

5,972

53,180

3,186

Other current assets

2,810

57,320

3,256

24,022

219,029

13,364

153,650

Property, plant and equipment Financial Investments

117,299

1,613

451

17,032

15,015

172,295

132,765

54,119

391,324

179,507

2,455

29,496

12,458

182

73

1,587

1,865

133,388

0

14,589

39,630

46,305

19,091

202,587

60,350

Long-term Debt

4,428

66,269

59,146

Other Liabilities

2,522

8,776

5,473

6,950

75,045

64,619

Other non-current assets

3,410

46,742

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Non-current Assets

PY

Cash

13,323

LIABILITIES Current Liabilities Accounts Payable Income Tax Payable Short-term debt Other current liabilities

Non-current Liabilities

TOTAL LIABILITIES

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TOTAL ASSETS

ED

30,097

65

Jollibee Foods Corporation (JFC) – JFC has a relatively high current and quick ratio. This is driven by its high cash and receivable balances. With its mass market operations and expansion plans, high liquidity ratios make sense. It can also be attributed to relatively low levels of current liabilities. This can be explained later on when efficiency ratios are computed and when operating cycle and cash conversion cycles are computed. These cycles will also show later on why JFC’s operating cash flows are high and which allows the company to pay its maturing obligations on time.

26,041 124,969 This Teaching Guide is a donation by277,634 CHED to DepEd. It is for reference purposes only.

Petron Corporation - As an established company operating in a stable oil industry, Petron’s liquidity ratios can be acceptable. What made Petron’s liquidity ratios low is the PHP133 billion short-term debt. If this is taken out, Petron’s liquidity ratios will be much higher. But this is a decision made by the management of the company. Later in the course when working capital financing policies are discussed, this is an indicator that the company has adopted a more aggressive working capital financing policy. Globe Corporation – Globe’s liquidity ratios are relatively low compared to the other two companies. This means that Globe might need to get more financing to meet its short-term obligations. However, since Globe is an established company, it won’t be difficult for it to get more credit from the bank or funding from investors. Emphasize that there are other financial ratios that need to be considered in determining the credit worthiness of Globe, not just liquidity ratios. Before you end this section, summarize the importance of liquidity ratios, how they are computed and the issues behind them such as high liquidity ratios are not necessarily good.

JFC

Petron

Globe

EQUITY 1,064

9,485

8,429

Additional Paid-in Capital

4,452

19,653

36,049

22,646

40,815

10,852

(84)

43,739

(792)

Total Equity

28,078

113,692

54,538

TOTAL LIABILITIES AND EQUITY

54,119

391,324

Sales Revenue

90,671

482,535

Other Equity Accounts

(73,728)

Cost of Sales/Service

19,435

92,574

(11,830)

(59,506)

6,137

7,605

33,068

748

1,736

1,255

(126)

(5,528)

(14,940)

6,759

3,813

19,383

(1,271)

(804)

(6,011)

5,488

3,009

13,372

ED

Operating Profie Other Income

Net Income Before Tax Income Tax Net Income After Tax

D EP

Other Expenses

4.

(10,661)

(10,806)

Operating Expenses

103,235

(463,100)

16,943

Gross Margin

179,507

C O

Retained Earnings

PY

Capital Stock

Ask the learners to compute the ratios of the sample companies and ask them to compare the three companies using the ratios computed. JFC

Petron

Globe

Current Ratio

1.26

1.08

0.77

Quick Ratio

0.80

0.54

0.67 66 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

5. Ask the learners the possible reason why the sample companies have different ratios. What could have possibly caused these differences? What are the implications? 6. Summarize the discussion for today. Focus on how to interpret the liquidity ratios.

PY

EVALUATION (20 MINUTES) 1. Provide a written true-or-false or multiple-choice quiz similar to the Practice exercises above.

• Which ratio is more relevant - quick ratio or current ratio?

C O

2. Include an essay question in the quiz. Possible questions would be:

D EP

ED

• What other factors would a bank or supplier look into in deciding whether to lend short-term credit? (Reflection question as pre-cursor for next topics)


Business Finance


15

Motivation

20

PY

Introduction Introduce the learning objectives and /Review review the concept of ‘profit’ and computation.

C O



ED


120MINS

Ask learners to give real-life business examples.

Instruction/ Define profitability ratios and solve sample Delivery

25

Practice

10

problems.


Enrichment Analyze and interpret profitability ratios for various companies from different industries.

Evaluation


Materials


D EP

Resources • Define the measurement levels, namely, liquidity, solvency, stability, and (1) Copies of sample financial statements profitability. (ABM_BF12-IIIb-7) • Compute, analyze, and interpret financial ratios such as current ratio, working capital, gross profit ratio, net profit ratio, receivable turnover, inventory turnover, debt-to-equity ratio, and the like. (ABM_BF12-IIIb-9)

Specific Learning Outcomes At the end of the lesson, the learners will be able to:

• Define profitability. • Solve profitability ratios (return on equity, return on assets, gross profit margin, operating profit margin, net profit margin). • Analyze, interpret, and compare the profitability ratios of sample companies. 68 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

30 20

INTRODUCTION/REVIEW (15 MINS) Teacher Tip:

1. Communicate learning objectives Introduce the following learning objectives using any of the suggested protocols (verbatim, own word, read-aloud): •

Define profitability.

•

Solve profitability ratios (return on equity, return on assets, gross profit margin, operating profit margin, net profit margin).

•

Analyze, interpret, and compare the profitability ratios of sample companies.

Teacher Tip: There are different levels of measuring profit: • gross profit • operating profit • net profit or net income

PY

•

C O

2. Review


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• Ask learners what they understand with the concept of ‘profit’. • Review how the gross profit margin, operating profit margin, net profit or net income is computed. Write down the formulas. (Refer to the sample financial statements in the Instruction/Delivery part.)

D EP

1. Ask learners to give examples of businesses which they think are very profitable and examples of businesses that they think are not profitable. Answers can range from specific company names to general type of businesses. 2. Take a pick from the examples given by the learners – one very profitable and one that is not so profitable. Discuss what factors affect their profitability. Factors could include pricing, costs, operating expenses, etc. 3. Ask learners to reflect why businesses have different levels of profitability?


Teacher Tip: Before proceeding to this part, make sure that the learners still remember the concept of profit or net income.

INSTRUCTION/DELIVERY (20 MINS) 1. Define profitability. •

Profitability refers to the company’s ability to generate earnings. It is one of the most important goals of businesses.

2. Define the profitability ratios and write the formulas in the board.

PY

Teacher Tip:

• These are the return on equity, return on assets, gross profit margin, operating profit margin, net profit margin.

C O

• Return on equity measures the amount of net income earned in relation to stockholders’ equity. • ROE (return on equity) = Net income ÷ Stockholders’ equity

• Return on assets measures the ability of a company to generate income out of its resources/assets. • ROA (return on asset) = Operating income ÷ Total assets

ED

• Gross profit margin shows how many pesos of gross profit is earned for every peso of sale. It provides information regarding the ability of a company to cover its manufacturing cost from its sales. Remember that gross profit is just sales less cost of goods or cost of services. • Gross profit margin = Gross profit ÷ Sales

D EP

• Operating profit margin shows how many pesos of operating profit is earned for every peso of sale. It measures the amount of income generated from the core business of a company. • Operating profit margin =Operating income ÷ Sales • Net profit margin measures how much net profit a company generates for every peso of sales or revenues that it generates. • Net profit margin = Net income ÷ Sales


In discussing the formula of the ratios, make sure learners know how the components are computed or where they are taken. For example, emphasize that stockholder’s equity should include all of its components including retained earnings. In computing ROE and ROA, some authors would prefer that the average stockholder’s equity and average total assets be used in the computation. The idea is that since net income is earned over the year, average equity and asset balances should be used. A simple way to compute for the average is just to add the beginning and ending balances then divide the sum by two. For ease, you may just use ending balances in computing the ratios. Note also that some authors use net income, instead of operating income as the numerator for ROA. Some use net income plus interest expense multiplied by (1-tax rate) in the numerator. The idea is to be consistent in the application of the formula.

Answer Key:

PRACTICE (10 MINUTES) Show a sample financial statement and ask learners to compute for the financial ratios. Ask them to present in front of the class.

ASSETS

PY

Sample Company Statement of Financial Position as of December 31, 2014 LIABILITIES AND STOCKHOLDERS’ EQUITY Accounts Payable


P 35,000.00

Short-term notes

Accounts Receivable

P 45,000.00 P 130,000.00

Inventories Current Assets

Total Liabilities Common stock

Buildings

P 1,600,000.00

Retained earnings

P 4,900,000.00

P 1,575,000.00


P 2,075,000.00


P 4,900,000.00

D EP

Total Assets

P 2,825,000.00 P 500,000.00

ED

P 2,970,000.00

P 125,000.00

P 2,700,000.00

Long-term debt

Equipment

P 4,570,000.00

P 55,000.00

Current Liabilities

P 330,000.00

Fixed Assets

P 70,000.00

C O

P 120,000.00

Cash

Return on equity = 16.98% = 352,240/2,075,000 Return on assets = 7.19% = 352,240/4,900,000 Gross profit margin = 35% = 700,000/2,000,000 Operating profit margin = 25.05% = 501,000/2,000,000 Net profit margin = 17.61% = 352,240/2,000,000


The ROE of 16.98% means that for every PHP1 of stockholders’ equity, PHP0.1698 or 16.98 centavos was earned in 2014. To be more meaningful, this rate of return is compared with the returns on alternative investments such as the returns on time deposits and other fixed income instruments. For example, if the interest on time deposits is only 2%, then the 16.98% ROE seems better. However, before a conclusion is made that the 16.98% ROE is better than the time deposit rate of 2%, the risks associated with this company earning 16.98% has to be assessed. Generally, the 2% time deposit rate is guaranteed while the 16.98% ROE is not. In 2014, ROE of Sample Company was high, but what if in the future, it will earn a negative ROE. Is this possible for a company? Yes! No manager in his/or sound mind will guarantee a specific rate of return, especially when that rate is relatively high. Why? Because in business, there are always risks. A company which is doing so well this year may find itself with too many competitors in the future and these competitors may eat its share of the business in the market and can make a profitable company today a losing company in the future.

Sample Company Statement of Financial Performance for the Year Ended December 31, 2014 Sales Revenue

P 2,000,000.00


P (1,300,000.00)

Operating Profit

P (199,000.00) P 501,000.00

Other Income

P 5,000.00

Other Expenses

P (2,800.00)

Income Tax Net Income after Tax

P 503,200.00 P (150,960.00) P 352,240.00


ED

Net Income before Tax

PY

Operating Expenes

P 700,000.00

C O

Gross Margin

D EP

1. Summarize and recap the relationship of the accounts in computing the ratios. 2. Show the statement of financial position and statement of financial performance of the three companies: Jollibee, Petron, and Globe. You may project the financial statements using LCD projector or overhead projector or provide printed copies. These financial statements can be used for the succeeding topics. You may also select other companies as examples. Just make sure to simplify and condense the financial reports before presenting them to class. Here is an extract of the statements of financial position of the three companies as of December 31, 2014. (Please refer to the previous teaching guide on liquidity ratios for the detailed statement.)


JFC

Petron

Globe

Total Assets

54,119

391,324

179,507

Total Liabilities

26,041

277,632

124,969

Total Equity

28,078

113,692

54,538

Gross Margin Operating Expenses Operating Profit Other Income Other Expenses Net Income before Tax Income Tax Net Income after Tax

90,671

482,535

103,235

(73,728)

(463,100)

(10,661)

16,943

19,435

92,574

(10,806)

(11,830.00)

(59,506)

6,137

7,605

33,068

748

1,736

1,255

(126)

(5,528)

(14,940)

6,759

3,813

19,383

(1,271)

(804)

(6,011)

5,488

3,009

13,372

ED


Globe

D EP

Sales Revenue

Petron

C O

JFC

PY

Here is the condensed statement of financial performance of the three companies for the year ended December 31, 2014.


3. Ask learners to compute the ratios of the sample companies and ask them to compare the three companies using the ratios computed. Petron

Globe

19.55%

2.65%

24.52%

Return on assets

10.14%

0.77%

7.45%

Gross profit margin

18.69%

4.03%

89.67%

Operating profit margin

6.77%

1.58%

32.03%

Net profit margin

6.05%

0.62%

12.95%

C O

Return on equity

PY

JFC

4. Ask the learners the possible reasons why the sample companies have different ratios. What could have possibly caused these differences? What are the implications?

D EP

ED

5. Summarize the discussion for today. Focus on how to interpret the profitability ratios.


Teacher Tip: Ask whether the high net income would mean high net cash inflows to the business. This is not necessarily the case. High net income might not result to high cash flows for the company. Remember that we use accrual method and not cash method in accounting for net income. This concept (quality of earnings) will be discussed in detail in the following modules.

EVALUATION (20 MINUTES) • Provide a written true-or-false or multiple-choice quiz about solving and interpreting profitability ratios. Answer Key:

1. Which of the following statements is true? B. Gross profit margin is always greater than net profit margin C. Gross profit margin is can be less than or greater than net profit margin

PY

1.C 2.C

A. Gross profit margin is always less than net profit margin

A. Sales is increasing, but cost of sales is decreasing B. Sales and cost of sales increase by the same percentage

ED

C. Sales and cost of sales decrease by the same percentage

C O

2. A business has a decreasing gross profit however, gross margin percentage is constant. What could be the possible reason?

D EP

• Include an essay question asking why it is important to use profitability ratios.


Business Finance


20

Motivation

20

PY


review the concepts behind the relevant accounts on the income statement and balance sheet

C O



ED


Discuss the granting of credit by sari-sari stores

Instruction/ Define efficiency ratios and solve sample Delivery

20

Practice

20

problems


Enrichment Analyze and interpret efficiency ratios for various companies from different industries.

Evaluation

Quiz and essay

• Define the measurement levels, namely, liquidity, solvency, stability, and profitability. (ABM_BF12-IIIb-7) • Compute, analyze, and interpret financial ratios such as current ratio, working capital, gross profit ratio, net profit ratio, receivable turnover, inventory turnover, debt-to-equity ratio, and the like. (ABM_BF12-IIIb-9)

Materials


(1) Copies of sample financial statements

D EP

120MINS

• Calculators • Laptops • Projectors • Handouts

Resources

• Define efficiency. • Solve efficiency/activity ratios (accounts receivable turnover, average collection period, average age of AR, or days sales outstanding, inventory turnover, average age of inventory or days in inventory, accounts payable turnover, average age of payables, average payment period, or days in accounts payable, total asset turnover, operating cycle, and cash conversion cycle. • Analyze, interpret, and compare the efficiency ratios of sample companies. 76 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

20 20

INTRODUCTION/REVIEW (20MINS) 1. Communicate the learning objectives Introduce the following learning objectives using any of the suggested protocols (verbatim, own word, read-aloud): Define efficiency.

•

Solve for efficiency/activity/turnover ratios (accounts receivable turnover, average collection period, average age of AR, or days sales outstanding, inventory turnover, average age of inventory or days in inventory, accounts payable turnover, average age of payables, average payment period, or days in accounts payable total asset turnover, operating cycle, and cash conversion cycle)

•

Teacher Tip: Make sure to emphasize that purchases are not found on the face of the financial statements but rather, are computed using this general formula:

PY

•

C O

•

Ending Inventory Add: Cost of Goods Sold Less: Beginning Inventory Purchases

Analyze, interpret, and compare the efficiency ratios of sample Philippine companies.

2. Review

D EP

ED

• Review the differences between an income statement and a balance sheet and what relevant accounts (accounts receivable, inventory, sales, cost of goods sold, purchases, accounts payable) mean. • Emphasize that income statement represents a period of time or the movement through that period while the balance sheet represents amounts as a point of time.


Teacher Tip:

1. Ask the learners if they have tried buying from sari-sari stores on credit. How many days were given to them as the “credit period” or the period within which they needed to pay? Do they strictly follow this credit period? When do they actually pay? 2. This time, ask them about the consequences of paying much later than the credit period on the operations of the sari-sari stores with respect to their obligations. Will it create problems for the sari-sari store if, for example, it has a due obligation tomorrow but none of its customers have paid their obligations yet? 3. Now ask them if a shorter credit period, by itself, is always better than a longer credit period or 77 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

The following table summarizes the possible effects of changes in credit terms (tenor). Short Credit Period

Long Credit Period

Effect on sales

Decrease

Increase

Effect on AR

Decrease

Increase

Effect on Bad Debt Expense*

Decrease

Increase

* the risk of customer not paying is less when given a short credit period.

does the length depend on other factors. 4. Write their answers on the board.


Teacher Tip: If the learners have a hard time memorizing the formulas, a simple tip is that the name of the turnover is the denominator in the formula.

PY

1. Define efficiency.

C O

• Efficiency refers to a company’s ability to be efficient in its operations. Specifically, it refers to the speed with which various current accounts are converted into sales, and ultimately, cash. • You may refer back to the sari-sari store example to illustrate the meaning of efficiency (in that example, the credit period is the target speed with which the store goals to collect their receivables). 2. Define the efficiency ratios and write the formulas in the board.

D EP

ED

• Accounts receivable turnover • Average collection period, otherwise known as average age of AR, days’ receivable or days sales outstanding • Inventory turnover • Average age of inventory or days’ inventory • Accounts payable turnover • Average age of payables, average payment period, or days’ payable • Total asset turnover • Operating cycle • Cash conversion cycle

Accounts receivable turnover =

Average collection period =

Sales

Accounts Receivable 365

Accounts Receivable Turnover


Assume all sales are on credit. For purchases, if there is no beginning inventory given, it is sufficient to use cost of goods sold as a substitute number, if there is no other information given. Even if both beginning and ending inventories are made available, some analysts still just use the cost of goods sold in computing accounts payable turnover ratio to facilitate the computation. Consistency must be observed in the application of the formula. In computing for these ratios, some authors would prefer to use that average amount of the balance sheet accounts involved (accounts receivable, inventory, accounts payable, total assets) in the computation. The idea is that since the income statement accounts are earned (sales) or incurred (cost of goods sold, purchases) over the year, average balances for the balance sheet accounts should be used. A simple way to compute for the average is just to add the beginning and ending balances then divide the sum by two. For ease, you may just use ending balances in computing the ratios. Whichever approach is used, consistency must be observed.

Cost of goods sold Inventory 365

Average age of inventory =

Inventory Turnover

Average payment period =

Purchases

Cash conversion cycle is also known as net trade cycle.

Inventory

C O

Accounts payable turnover =

For our purpose, we will consistently be using 365 days.

PY

Inventory turnover =

For the number of days in a year, 365 or 360 maybe used. Again, consistency must be observed. There are occasions when quarterly data instead of annual are used, hence, use 90 in the formulas for computing average collection period, average age of inventory, and average payment period.

365

Accounts Payable Turnover

ED

Operating Cycle = Average Collection Period + Average Age of Inventory

OR

D EP

Cash Conversion Cycle = Average collection period + Average age of inventory - Average age of payables

Cash Conversion Cycle = Operating Cycle - Average Age of Payables

3. Show a sample financial statement and ask learners to compute the ratios:


Answer Key: Sample Company Statement of Financial Position as of December 31, 2014 ASSETS

LIABILITIES AND STOCKHOLDERS’ EQUITY P 120,000.00

Accounts Payable

P 70,000.00


P 35,000.00

Short-term notes

P 55,000.00

Accounts Receivable

P 45,000.00

Inventories

P 130,000.00 Current Assets

Current Liabilities Long-term debt

P 2,700,000.00

Total Liabilities

P 330,000.00 P 2,970,000.00

Common stock

Buildings

P 1,600,000.00

Retained earnings

P 2,825,000.00 P 500,000.00

C O

Equipment

P 125,000.00

PY

Cash

P 1,575,000.00

Fixed Assets

P 4,570,000.00


P 2,075,000.00

Total Assets

P 4,900,000.00


P 4,900,000.00

P 2,000,000.00


P (1,300,000.00)

Operating Expenes Operating Profit Other Income Other Expenses Net Income before Tax Income Tax Net Income after Tax

P 700,000.00

D EP

Gross Margin

ED


(provide that the beginning inventory is P 247,000): • Accounts recievable turnover: 44.4x • Average collection period: 8.2 days • Inventory turnover: 10x • Average age of inventory: 36.5 days • Accounts payable turnover: 18.57x • Average payment period: 19.65 days • Total asset turnover: 0.41x • Operating cycle: 44.7 days • Cash conversion cycle: 25.05 days

P (199,000.00) P 501,000.00 P 5,000.00

P (2,800.00)

P 503,200.00

P (150,960.00) P 352,240.00 80 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.


Teacher Tip: By this time, the learners should’ve mastered the computation of efficiency ratios and the different names of each ratio.

Provide exercises. Here are sample questions with varying difficulty: (Easy)

Answer Key: • Total asset turnover = 1.5M/750K = 2 • Average collection period: 365/4 = 91.25 • Average collection period = 43.8 days, Accounts receivable turnover = 8.3x • Inventory turnover = 13.1x, Average age of inventory = 27.8 days • Accounts payable turnover = 3.25x, Average payment period = 112.3 days • Accounts payable turnover = 2.6x, Average age of payables = 140.4 days • Total asset turnover = 2.5x • Operating cycle = 71.6 days, Cash conversion cycle = (40.7) days

C O

PY

• Total asset is PHP750,000. Sales is PHP1,500,000. What is the total asset turnover? • Accounts receivable turnover is 4. What is the average collection period assuming annual data are used? What is the average collection period assuming quarterly data are used? • Sales for the year amount to PHP100,000. Accounts receivable amount to PHP12,000. What is the average collection period assuming annual data are used? What is the average collection period assuming quarterly data are used? (Average/Difficult)

A. The quick ratio is 1.7 while the current ratio is 2.5. The current liabilities amount to PHP5,000. Cost of goods sold is PHP52,500. What is the inventory turnover? Average age of inventory?

ED

B. Beginning inventory is PHP2,000 while ending inventory is PHP5,000. Cost of goods sold is double the ending inventory and accounts payable is PHP4,000. What is accounts payable turnover? Average payment period? C. Ending inventory is PHP13,000 while accounts payable is PHP2,500. Purchases were half the ending inventory. What is accounts payable turnover? Average age of payables?

D EP

D. Current assets amount to PHP30,000 while noncurrent assets are PHP50,000. Sales amount to PHP200,000. What is the total asset turnover? E. Based on your answers from letters c, d, and e, what is the operating cycle of the company? Cash conversion cycle?


ENRICHMENT (20 MINUTES) 1. Summarize and recap the relationship of the accounts in computing the ratios. 2. Ask learners to discuss what they think the ratios mean and its applications. Some reflection questions you may use: (Check the teacher tips to the right for answers/discussions)

A company’s average collection period should be compared with the credit terms it grants its customers. If the average collection period is higher than the credit period, it may indicate a problem with the credit department (granting credit to noncreditworthy people or companies) or with the collection department (inefficient or lack of means of collection) or both.

D EP

ED

C O

PY

• Are high turnover ratios good or bad? (Possible answer: It really depends on the operations of the company. High inventory turnover ratios are less costly for the company but it can also create more risks for the company. For example, very high inventory turnover ratios could mean that there are inventory stock-outs or lost sales since a very low turnover is maintained. On the other hand, A company will want to have a low payable turnover ratios.) • If company A has accounts receivable turnover of 3.5 while company B has an accounts receivable turnover of 8.1, which is a better company? Explain why. (Generally, a company with higher receivable turnover, assuming all other factors are same, is at a better position compared to a company with a lower receivable turnover) • What factors affect inventory turnover ratio? (Possible answers: projected sales, industry developments, nature of industry, management decisions, stock out costs) • What factors affect accounts payable turnover ratio? (Possible answers: credit terms of suppliers, relationship to suppliers, availability of supplies in the market) • Does a shorter or a longer operating cycle indicate the efficiency of a business? What about for the cash conversion cycle? (See teacher tips for discussion)

Teacher Tip:

3. Show the statement of financial position and statement of financial performance of three companies: Jollibee, Petron, and Globe. You may project the financial statements using LCD projector or overhead projector or provide printed copies. These financial statements can be used for the succeeding topics. You may also select other companies as examples. Just make sure to simplify and condense the financial reports before presenting them to class. The condensed financial statements of the three companies as of December 31, 2014 were already provided in the previous modules. 4. Ask learners to compute the following ratios of the sample companies: 82 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Teacher Tip: Inventory turnover is more meaningful when compared with that of the industry norms. High industry turnovers are common (and expected) for fastfood restaurants but not for real estate firms. Fastfood restaurants sell stocks very quickly and keep just the right amount of inventories to prevent spoilage, storage, and handling costs. But it is common for real estate firms to take a couple of years before selling units.

Teacher Tip: Average payment period makes sense to be analyzed in relation to the credit terms extended by a company’s suppliers. If a company manages to pay beyond the credit period available (in finance, this is called “stretching the payables”) without

damaging its credit rating, then this indicates good payables management by the company because they are able to take advantage of (almost) free financing. (The cost of financing for accounts payable can actually be computed using the amount of percent discount granted to the firm and the credit period, which shall be discussed in later topics.)

A. Average collection period B. Average age of inventory C. Average payment period D. Operating cycle E. Cash conversion cycle

Petron

Globe

30.68

13.56

83.24

Average age of inventory

29.57

41.91

109.08

Average payment period

12.15

23.25

426.52

Operating cycle

60.24

55.48

192.32

Cash conversion cycle

48.09

32.23

(234.21)

ED

Average collection period

C O

JFC

Total asset turnover indicates the degree to which management has efficiently used the firm’s assets to generate sales. Generally, the higher the ratio, the more efficiently its assets have been used. In other words, a higher ratio is a strong positive indicator of a firm’s operations. However, note that, due to depreciation of fixed assets, older companies in an industry may appear to be much more efficient in terms of generating sales using its assets. Because of this, a higher-than-average total assets turnover might indicate that the company is already in its mature stage (due to high sales amount relative to assets), that its fixed assets are getting too old, or that it may need to review its depreciation policies (it may be depreciating its fixed assets too quickly).

PY

Answer Key:

D EP

5. Ask the learners the possible reason why the sample companies have different turnover ratios, operating cycle and cash conversion cycle. 6. Before you end this section, summarize the importance of efficiency ratios, how they are computed, and the caveats to each ratio (such as high turnover ratios are not necessarily good while low turnover ratios are not always a sign of trouble either).


The measure for operating cycle imparts more insight if analyzed in comparison to a company’s peers in its industry. A longer operating cycle compared to the industry average might be a sign of a problem with its receivables management (poor credit or collection policies) or with its inventory management (holding too much inventories, which could become obsolete or damaged) or both. In the same manner, a shorter operating cycle could also be a signal for too-tight receivables management (very aggressive collection policies or too strict with the granting of credit, which might turn away customers eventually or might be a reason for high administrative costs

associated with collection or extensive background-checking) or inventory management (keeping too little stocks, causing frequent stockouts and lost opportunities for sales) or both.

D EP

ED

C O

PY

The cash conversion cycle goes one step further by including the measure of average payment period. Comparing this number with that of other companies in the industry also gives insight into the firm’s receivables, inventory, and payables management. In addition to the discussion in the previous paragraph, a cash conversion cycle that is higher than the industry norm might indicate that a company pays for its payables too fast (and does not take advantage of the financing extended to it) while a cash conversion cycle that is lower than the average might be an indication of poor payables management (the company’s credit rating might significantly deteriorate by not paying its payables within the period given). For the cash conversion cycle, it may be helpful for the learners if they can see a “timeline” of events to see the chronology of the events and understand the period specified by the number.

Jollibee Foods Corporation (JFC) – JFC relatively has a high accounts receivable turnover. This low receivables balance of JFC is due to nature of its operations where customers pay in cash. The accounts receivable balance maybe from its franchisees where JFC has control over. Similarly, inventory turnover is the highest again due to the nature of its operations as a fastfood company. It holds only enough quantity of stocks and sells them quickly.


Its relatively low operating cycle makes sense, again, because it reflects the nature of its business of being in the fastfood

industry. It sells its stocks quickly and converts its receivables almost instantaneously, relatively speaking.

D EP

ED

C O

PY

Petron Corporation – The average collection period of Petron is mainly caused by its industrial customers. These are customers who are also businesses that are given credit periods as compared to normal consumers who need to pay in cash when purchasing fuel from the gas station. As expected with Petron’s products, it has a longer average age of inventory versus Jollibee. On average, the suppliers in the fuel and oil industry provide longer credit terms versus the food industry as evidenced by Petron’s longer average payment period (versus JFC). . Globe Corporation - The high average collection period is hard to explain at 83 days. This might be driven by postpaid subscribers.


Since its inventory is mostly composed of cellphones and other mobile devices, the computed average age of inventory is reasonable. The average payment period is also quite surprising at 426.52. Globe could have a high bargaining power with its suppliers or they have special kinds of agreements that can’t be inferred from the provided data.

EVALUATION (20 MINUTES) 1. Provide a written true-or-false or multiple-choice quiz similar to the Practice exercises above. 2. Include an essay question in the quiz. Possible questions would be:

PY

• When compared with last year, a company’s inventory turnover increased. What positive situation might this reflect? Possible answer: Sales has increased or the company has maintained low levels of inventory due to better inventory management and sales forecasting.

D EP

ED

C O

• What is the incentive of management in computing efficiency ratios? Possible answer: To monitor performance and do remedial actions if actual performance falls below plans.


Business Finance


20

Motivation

10

PY


review the concepts behind the relevant accounts on the income statement and balance sheet

C O


D EP


ED



120MINS

Discuss the use of borrowings as capital in starting a business

Instruction/ Define leverage ratios and solve sample Delivery

30

Practice

20

problems


Enrichment Analyze and interpret leverage ratios for various companies from different industries.

Evaluation Materials

Quiz and essay • Calculators • Laptops • Projectors • Handouts

Resources (1) Copies of sample financial statements


• Define financial leverage. • Solve leverage ratios (debt ratio, debt-to-equity ratio, interest coverage ratio). • Analyze, interpret, and compare the leverage ratios of sample companies. 87 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

20 20

INTRODUCTION/REVIEW (20MINS) Teacher Tip:

1. Communicate the learning objectives Introduce the following learning objectives using any of the suggested protocols (verbatim, own word, read-aloud): •

Define leverage.

•

Solve leverage ratios (debt ratio, debt-to-equity ratio, interest coverage ratio)

•

Analyze, interpret, and compare the leverage ratios of sample companies

Relevant accounts are those accounts needed to solve leverage ratios.

PY

•

2. Review


ED

C O

• Review the difference between an income statement and a balance sheet and what relevant accounts (liabilities, assets, equity, interest expense, earnings before interest and taxes) mean. • Emphasize that income statement represents a period of time or the movement through that period while the balance sheet represents amounts as of a point in time.

D EP

1. Ask learners how one opens their own business? Ask them what if you have no capital or personal money ready to start a business? 2. They will most likely answer that one can borrow from friends, family, and banks. Follow-up by asking them what these borrowings entail? Make sure that idea of paying interest is brought up. 3. Ask them how paying interest affects the earnings of the company.



Teacher Tip:

1. Define financial leverage. • Financial leverage refers to the company’s use of debt. It defines the company’s capital structure which indicates how much of the total assets are financed by debt and equity.

PY

2. Illustrate how financial leverage works. The teacher may provide a scenario/case where an entrepreneur is deciding how to finance a business venture, specifically what capital structure should be chosen. With this, you can demonstrate that with increased debt comes greater risk as well as higher potential return. An example is provided before:

Before reaching this point, make sure the class understands what debt and preferred stocks are.

D EP

ED

C O

• Pam has a small restaurant business with current equity of PHP60,000. With the increasing demand, she is planning to expand her restaurant space. After much analysis she determined that an initial investment of PHP50,000 in fixed assets is necessary. These funds can be obtained in either of two ways. The first is the no-debt plan, under which she would ask a relative to become an investor (owner) by investing the full PHP50,000. The other alternative, the debt plan, involves borrowing PHP50,000 from the nearby rural bank at 10% annual interest. • Pam expects PHP 30,000 in annual sales, PHP18,000 in operating expenses, and a 30% tax rate. The no-debt plan results in after-tax profits of PHP8,400, which is an 8.4% return on equity (new equity of PHP100,000) • The debt plan results in PHP4,400 of after-tax profits or 8.8% return on equity (equity still at PHP50,000). The debt plan provides Pam with a higher rate of return, but the risk of this plan is also greater, because the annual PHP5,000 of interest must be paid whether Pam’s business is profitable or not.” • Provide sensitivity analysis, focus on Earnings before Income Tax [EBIT] • You may summarize the results of the two alternatives in the board.

3. Define the types of leverage ratios and write the formulas on the board. • Debt ratio – This ratio measures the proportion of total assets finance by total liabilities or money provided by creditors (not by the business owners). • Debt-to-equity ratio – A variation of debt ratio, shows the proportion of debt to equity. • The teacher may review the accounting equation (Assets = Liabilities + Equities) in showing how the first two ratios relate. • Interest coverage ratio – This ratio shows the company’s ability to pay its fixed interest charges in 89


relation to its operating income or earnings before interest and taxes. Total Liabilities Total Assets

Debt-to-Equity Ratio =

Total Liabilities

Earnings before interest and taxes (EBIT) Interest Expense

C O

Interest coverage ratio * =

Total Equity

PY

Debt Ratio =

* Another name of interest coverage ratio is Times Interest Earned.

4. Show a sample financial statement and ask learners to compute for the ratios.

ASSETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

P 120,000.00

Marketable Securities Accounts Receivable

Buildings

P 45,000.00

P 130,000.00

Current Assets Equipment

P 35,000.00

Accounts Payable

P 70,000.00

Short-term notes

P 55,000.00

D EP

Cash

Inventories

ED

Sample Company Statement of Financial Position as of December 31, 2014

P 330,000.00

Current Liabilities

Long-term debt

P 2,700,000.00

Total Liabilities

P 2,970,000.00

Common stock

P 1,600,000.00

Retained earnings

P 125,000.00

P 2,825,000.00 P 500,000.00 P 1,575,000.00

Fixed Assets

P 4,570,000.00


P 2,075,000.00

Total Assets

P 4,900,000.00


P 4,900,000.00


Answer Key: Debt ratio = 57.65% Debt-to-equity ratio = 1.3614 Interest coverage ratio = 180.7143


P 2,000,000.00


P (1,300,000.00)

Gross Margin

Additional note: “Other expenses” in the Statement of Financial Performance is composed solely of interest expense. Hence, interest expense for the period ended December 31, 2014 is Php 2,800.

P 700,000.00 P (199,000.00)

PY

Operating Expenes

Other Income

P 5,000.00

Other Expenses

P (2,800.00)

C O

P 501,000.00

Operating Profit

P 503,200.00

Net Income before Tax Income Tax

P (150,960.00)

Net Income after Tax

ED

P 352,240.00

5. Discuss what factors influence capital structure, hence, also affecting leverage ratios. You may refer to Cayanan, et.al. for more discussions. The following are just some of the factors that can influence management’s decision in setting its capital structure.

D EP

• Nature of Business • Stage of Business Development • Macroeconomic conditions • Prospects of the industry • Taxes • Management style


Teacher Tip: Nature of Business – If the business is risk then it has to be financed conservatively hence, lower debt ratio. State of Business Development – A newly formed business may have difficulty borrowing from banks. Banks usually look for the historical financial performance of borrowers. Macroeconomic conditions – If the overall economy is good then management can be more aggressive on taking in risk through increased debt financing. Prospects of the industry – A growing industry makes business more confident to take on more financial risk. Taxes - Interest expenses are tax deductible while cash dividends are not. By having more debt than equity, businesses save on taxes as interest expense (multiplied by the tax rate) decreases income tax due. Management style –Management and the board of directors can be aggressive or conservative in terms of taking on risk.


Teacher Tip: By this time, the learners should’ve mastered the computation of leverage ratios and the different names of each ratio.

Provide exercises. Here is a sample question: 1. (Easy) Total assets is 100,000. Total debt is 50,000. What is the debt-to-equity ratio?

A. debt must increase by PHP300,000. B. equity must increase by the full PHPH400,000.

C O

C. debt must increase by PHP171,428. D. equity must increase by PHP100,000.

ED


1. 100% or 1 2. c - debt must increase by P171,428.

PY

2. (Average/Difficult) If the pro forma balance sheet shows that total asset increase by PHP400,000 while retaining a debt-equity ratio of .75 then:

Answer Key:

Answer Key: (Change % to times) JFC

1. Summarize and recap the relationship of the accounts in computing the ratios.

D EP

2. Ask learners to discuss what they think the ratios mean and its applications. Some reflection questions: • What is a good capital structure? • Are low debt ratios always favorable?

3. Show the statement of financial position and statement of financial performance of three companies: Jollibee, Petron, and Globe. You may project the financial statements using LCD projector or overhead projector or provide printed copies. These financial statements can be used for the succeeding topics. You may also select other companies as examples. Just make sure to simplify and condense the financial reports before presenting them to class. • The condensed financial statements of the three companies as of December 31, 2014 were already provided in the previous modules. 92 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Petron

Globe

Debt Ratio

8%

17%

33%

Debt-toEquity Ratio

16%

58%

108%

45.32

1.69

8.56

Interest coverage ratio Recall:

JFC Return on equity

19.55%

Petron Globe 2.65%

24.52%

• Note: Included in the 2014 Income Statement of the three companies are Interest Expenses:

JFC

Interest Expense 152.50

Petron

5,528.00

Globe

2,565.00

PY

Company

C O

4. Ask the learners to compute the ratios of the sample companies and ask them to compare the three companies using the ratios computed. Recall other relevant ratios like return on equity in highlighting how leverage magnifies risk and return in companies. 5. Ask the learners the possible reason why the sample companies have debt ratios.

ED

Answers will mostly focus on the selected companies’ nature of business, management style/preference, stability of cash flows. 6. Summarize the discussion for today. Focus on how to analyze and interpret the efficiency ratios.

D EP

EVALUATION (20 MINUTES)

1. Provide a written true-or-false or multiple-choice quiz similar to the Practice exercises above. 2. Include an essay question in the quiz. Possible questions would be: • In starting a business, is it okay to start with having debt during the early stages? • What dictates the company’s choice of leverage structure?


Business Finance


15

Case Analysis

45

PY


review financial ratios, focusing on liquidity and efficiency ratios. Introduce the case study.

C O


D EP


ED



120MINS

Ask learners to analyze and discuss the case in groups.

Presentation Ask assigned groups to present their case analysis to the whole class.

Enrichment Discuss important points of the case and and provide commentaries to the groups’ Summary analysis.

Materials

• Calculators • Laptops • Projectors • Textbook

Resources (1) Several copies of case to distributed to learner-groups


• Apply their knowledge on liquidity and efficiency ratios in tackling real life business problems. • Pinpoint business problems and formulate relevant recommendations and strategies. 94 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

30 30

PRE-WORK Provide copies of the financial statement of the subject company to the learners a day before the class. Ask them to compute for liquidity and efficiency ratios.

PY

INTRODUCTION/REVIEW (15MINS)

C O

1. Review profitability and leverage ratios. Ask learners what liquidity and efficiency mean. Write the names of the different types of ratios and their formulas on the board. 2. Explain that business cases are used to discuss certain issues and problems of a specific company. Learners will take the point-of-view of owners/managers in analyzing the case. 3. Discuss the mechanics of the case discussion:

D EP

ED

• The class will be divided in groups of 4 to 6 learners. • Learners will discuss and analyze the business case among their groups. They will then need to summarize their analysis in an essay/paper. The paper will have the following outline: Case Background/Story, Analysis (including computations), and Recommendation. The paper can be one to two pages of yellow sheet or bond paper. They must do this within 45 minutes. • Two groups will be asked to present. Presenting groups do not need to submit an essay/paper. Instead, they need to prepare their presentation with materials like manila paper, transparencies, or PowerPoint. Groups can volunteer or the teacher can also assign who will Presentation time is 10 minutes for each group. After the presentation, there will be a 5-minute Q&A session. 4. Distribute the printed cases to the learners.


CASE ANALYSIS (60 MINS) 1. Allow the learners to break into groups. From time to time, update them with the remaining time to do the analysis and their essay/ presentation.

PY

2. Make sure to remind them that they will take on the shoes of the owner/manager in solving the case. 3. Below is the business case. You may look for or make another business case as long as it highlights the same topics. Chloe’s Closet

C O

Chloe Mendez owns a clothing company, Chloe’s Closet. She has a team of tailors who work for 8 hours every day from Monday to Saturday. Demand for her business is strong but there seems to be something preventing her from meeting the demands of her customers.

ED

Chloe sells to both big department stores and small boutique stores under the brand Chloe’s Closet. Some brands also ask her to manufacture their own designs. Business for Chloe has been good since it started last 2014. In fact, despite the tough competition from cheaper manufacturers abroad, she still manages to grow her customer base.

D EP

On December 4, 2015 Chloe received a billing statement from a raw material supplier for an amount of PHP400,000 which will be due in 5 days. She is also scheduled to pay her employees’ monthly salary of PHP70,000 the following day. Upon checking her bank account, she only has a PHP67,000 balance. She knew she had exceeded her sales target last October and November so she is wondering why she only has this amount of cash in her bank account. Was her money stolen? Being a CPA, she checked the bank statement and her financial records and found no mistakes. Here is the latest financial statement of Chloe’s Closet as of November 30, 2015:


Statement of Financial Position

Cash

Dec 31, 2014 270,000.00

Accounts Receivable

740,000.00

500,000.00

Inventory

600,000.00

400,000.00

Machinery

800,000.00

850,000.00

2,200,000.00

2,020,000.00

Accounts Payable

400,000.00

500,000.00

Salaries Payable

150,000.00

150,000.00

400,000.00

500,000.00

200,000.00

200,000.00

Total Liabilities Capital Stock Accumulated Profit Total Equity

1,600,000.00

1,320,000.00

1,800,000.00

1,520,000.00

2,200,000.00

2,020,000.00

D EP

TOTAL EQUITY AND LIABILITIES

ED

TOTAL ASSETS

C O

60,000.00

PY

Nov 30, 2015

Statement of Financial Position

Nov 30, 2015

Dec 31, 2014

800,000.00

600,000.00

300,000.00

225,000.00

100,000.00

105,000.00

Operating Income

400,000.00

270,000.00

Machinery

120,000.00

81,000.00

280,000.00

189,000.00

Sales Cost of Goods Sold Operating Expenses

NET INCOME

97


What’s wrong with Chloe’s Closet?

PRESENTATION (30 MINS)

PY

1. Time each presentation. Ask groups to stop presenting after 10 minutes. Be strict with the time.

ENRICHMENT AND SUMMARY (15 MINUTES)

C O

2. After each presentation, ask the presenting group some questions or clarifications. You can also challenge the computations/recommendations of the learners. You may also provide general comments of the presentation flow and aesthetics. Ask other groups to also provide comments and questions to the presentations. This should take 5 minutes.

2. Provide your own analysis.

ED

1. Write on the board the main points raised by the presenting groups.

• Start by pinpointing the main issues relevant to the case (AR, Inventory, Payables).

D EP

• Provide the correct figures for the profitability and leverage ratios.

• Discuss how you arrived at your decision. Highlight important recommendations/changes that must be done to the operations of Chloe’s Closet.


Teacher Tip: Guide Questions for the Case: 1. Did learners check the efficiency of AR management? What was AR turnover between 2014 and 2015? 2. Did learners check the efficiency of Inventory management? What was Inventory turnover between 2014 and 2015? 3. What was the payable turnover for Chloe’s Closet? How did it affect the problem? 4. What factors lead to the low cash balance for Chloe’s Closet?

Business Finance


180MINS

10

Motivation

20

PY

Introduction Brief review of the contents of a financial /Review statement and introduce the four types of financial ratios.

C O


Discuss stories about households borrowing from a sari-sari store.

60

Practice


15


Enrichment Analyze and interpret liquidity ratios for

45

Learning Competencies The learners shall be able to perform vertical and horizontal analyses of financial statements. (ABM_BF12-IIIb08)

Materials

D EP

ED

Instruction/ Define liquidity ratios and solve sample Delivery

various companies from different industries.

Evaluation


30

• Calculators • Laptops

Resources (1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex Bookstore.

Specific Learning Outcomes At the end of the unit lesson, the learners will be able to: • •

problems.

(2) Gitman and Zutter. Principles of Managerial Finance.

Explain why managers analyze financial statements. Perform horizontal and vertical analysis of balance sheets and income statements.


INTRODUCTION/REVIEW (10 MINS) 1. Communicate learning objectives. Introduce the following learning objectives using any of the suggested protocols (verbatim, own word, read-aloud): •

I will be able to explain why managers analyze financial statements.

•

I will be able to perform horizontal and vertical analysis of balance sheets and income statements.

PY

•

2. Review the previous lessons.

C O

• Ask learners what are the different types of financial statements. • Ask learners what the contents are of the financial statements.

ED


Show the following Financial Statements of ABC, Inc. and ask the learners the following questions:

D EP

• • •

Is ABC, Inc. profitable? Is the company’s financial performance improving based on the two year data presented? Is the company heavily financed by debt or equity?


Teacher Tip: The purpose of this activity is to expose the learners to the financial statements and for them to come up with useful conclusions on the company’s financial results and status. The learners are assumed to be already familiar with different financial statements. Elicit as many opinions as possible.

ABC, INC. Condensed Balance Sheets December 31 (In millions) 2014

2015 1,617.1

Plant Assets

2,952.8

2,526.9

Other Assets

5,513.8

742.0

P

10,368.6

4,886.0

P

2,017.6

2,482.3

Long-term liabilities

7,289.5

1,506.2

Total libailities

9,497.1

3,988.5

P

Total Assets

C O

1,902.0

Current Assets

Liabilities and Stockholders’ Equity

ED

Current liabilities

Stockholders’ equity Common stock

Total stockholders’ equity

195.3

205.8

1,013.3

1,065.7

(337.1)

(374.0)

871.5

897.5

P 10,368.6

P 4,886.0

D EP

Retained earnings Treasury stock

PY

Assets

Total liabilities and stockholders’ equity

Teacher Tip: Ask the learners if their answers to previous questions have changed.


ABC, INC. Condensed Income Statement For the Years Ended December 31 (In millions) 2015 6,954.7

Cost of goods sold

4,128.5

3,327.0

Gross Profit

4,724.0

3,627.7

Selling & Admin.

3,523.6

2,551.4

33.3

86.5

1,167.9

989.8

351.5

137.5

(12.3)

15.4

804.1

867.7

322.1

280.0

P 482.0

P 587.7

Nonrecurring charges Income from operations Interest Expense

P

Income before taxes Income tax expense Net income

D EP

(expense), net

ED

Other income

C O

8,853.3

Net sales

PY

2014

• Ask the learners to compute the percentage share of each Balance Sheet account vis a vis total assets. • Ask the learners to compute the percentage share of each Income Statement vis a vis Net Sales.


INSTRUCTION/DELIVERY (60 MINS) After discussing the answers of the learners, introduce financial statement analysis with emphasis on common size and horizontal analyses. Discuss the following to the learners. 1. Analysis and Interpretations of Financial Statements

•

PY

C O

•

ED

• •

To guide different users of financial statements, i.e. creditors, investors, regulators and managers, in their decisions, financial statement analysis tools can be used. These are financial ratios, common size financial statements, and trend or horizontal analyses. For the purposes of this course, four major categories of financial ratios will be covered: liquidity ratios, efficiency or turnover ratios, profitability ratios, and leverage ratios. To be more specific, financial statement analysis is undertaken to serve the following purposes (objectives): • To assess the current profitability and operational efficiency of the firm as a whole as well as its different departments so as to judge the financial health of the firm. • To ascertain the relative importance of different components of the financial position of the firm. • To identify the reasons for change in the profitability/financial position of the firm. • To judge the ability of the firm to repay its debt and assess the liquidity and solvency position of the firm. For this module inform the learners that focus will be on common size or vertical analysis and trend or horizontal analysis.

D EP

•

2. Vertical Analysis or common size analysis.

• This is a technique for evaluating the data of financial statements that express each item within a financial statement in terms of a percent of a base amount. • For the Statement of Financial Position or Balance Sheet, all accounts are presented as a percentage of total assets. • For the statement of Profit or Loss or Income Statement, all accounts are presented as a percentage of net sales. • In using this type of analysis, attention must be focused on items with significant changes from one period to another. Depending on the nature of the business, it is possible that even a slight change in 103 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Teacher Tip: Remind the learners that the activity they did before was actually common size analysis.

the percentage may warrant the attention of top management. • For example, a reduction of 0.5% in the gross profit margin of a consumer based company with annual sales of PHP 200 billion translate to a PHP 1 billion in gross profit. 3. Horizontal Analysis

C O

To compute: Amount of change = Current year amount – Base (earlier) year amount Percent of change = Amount of change/Base (earlier) year amount

PY

• This allows the learners to see the trend for the different accounts in the Financial Statements. • This is also known as trend analysis. • To establish the trend, percentage changes of accounts from one period to another have to be made.

Horizontal Analysis of a Balance Sheet:

ED

Some of the more important accounts to monitor when doing trend analysis are the following: • Sales • Operating profits • Total assets • Interest bearing liabilities • Interest expense

D EP

AC CORPORATION Condensed Balance Sheets December 31 2014

2015

P 74,000

P 80,000

P (6,000)

(7.5%)

Property, plant & equipment (net)

99,000

90,000

9,000

10.0%

Intangibles

27,000

40,000

(13,000)

(32.5%)

P 200,000

P 210,000

P (10,000) 104

(4.8%)

Assets Current assets

Total Assets

Increase (Decrease)

Teacher Tip:

Percentage Change from 2011


Show the sample financial statements with the computed vertical and horizontal analyses. Discuss how to perform the horizontal and vertical analyses with the learners. Compute with them the example numbers. This will help them easily see how to go through the process.

2014

2015

Increase (Decrease)

Percentage Change from 2011

Liabilities and stockholders’ equity P 42,000

P 48,000

P (6,000)

(12.5%)

Long-term liabilities

143,000

150,000

(7,000)

(4.7%)


15,000

12,000

3,000

25.0%

P 200,000

P 210,000

P (10,000)

Horizontal Analysis of an Income Statement: AC CORPORATION Condensed Balance Sheets For the Years Ended December 31

(4.8%)

C O


PY

Current liabilities

2014

Cost of goods sold Gross profit Operating expenses Net income

P 600,000

2015

P 500,000

D EP

Net sales

ED

Increase or (Decrease) During 2011

Amount

Percentage

P 100,000

20.0%

483,000

420,000

63,000

15.0%%

117,000

80,000

37,000

46.3%%

57,200

44,000

13,200

30.0%

P 59,800

P 36,000

P 23,800

66.1%%


Vertical Analysis of a Balance Sheet:

AC CORPORATION Condensed Balance Sheet December 31, 2012 Percent

PY

Amount Assets Current Assets

P

37.0%

Property, plant, and equipment (net)

99,000

49.5%

Intangibles

27,000

13.5%

P

200,000

100.0%

P

42,000

21.0%

Total Assets

Current liabilities Long-term liabilities Stockholders’ equity

143,000

71.5%

15,000

7.5%

200,000

100.0%

D EP

Total liabilities and stockholders’ equity P

ED


C O

74,000


Vertical Analysis of an Income Statement: AC CORPORATION Condensed Income Statements For the Years Ended December 31 2012

Net sales

Percent

Amount

Percent

PY

Amount

2011

100.0%

P 500,000

100.0%

Cost of goods sold

483,000

80.5%

420,000

84.0%

Gross profit

117,000

19.5%

80,000

16.0%

57,200

9.5%

44,000

8.8%%

P 59,800

10.0%

P 36,000

7.2%

Net income


Horizontal Analysis:

D EP

Provide these practice exercises:

ED

Operating expenses

Dec. 31, 2012

Accounts receivable Inventory Total Assets

C O

P 600,000

Dec. 31, 2011

Teacher Tip: Ask the learners to practice computing the horizontal and vertical analyses on the given practice sets.

Increase or (Decrease) Amount

Percentage

PHP 520,000

PHP 120,000

400,000

30.0%

PHP 840,000

PHP 240,000

600,000

40.0%

PHP 3,000,000

PHP 2,500,000

500,000

20.0%


Vertical Analysis: Dec. 31, 2012 Amount

Dec. 31, 2011

Percentage*

Amount

Percentage**

P 520,000

17.3%%

P 400,000

16.0%

Inventory

P 840,000

28.0%

P 600,000

24.0%

P 3,000,000

100.0%

P 2,500,000

Total Assets

100.0%

C O


PY

Accounts receivable

1. Group the learners for a group work. Ask them to compute the Horizontal and Vertical Analyses of ABC Inc’s financial statement shown above in the motivation section.

D EP

ED

2. After the groups have computed the Horizontal and Vertical Analyses, ask them the same question about their opinions about the company’s profitability, the ability pay debt obligations, and how well it is manage financially.


Teacher Tip: Refer to the answers of the learners above in the Motivation section. Ask them to make opinions and a conclusion about the company after they have used the horizontal and vertical analyses tools. Make them compare their answers in the Motivation and Enrichment sections. This will make them realize the importance of using the horizontal and vertical analyses for judgement and making better decisions.

Below are the computed Horizontal and Vertical Analyses:

Assets

2014

PY

ABC, INC. Condensed Balance Sheets December 31 (In millions) Increase (Decrease) during 2015 2015

Amount

Percent

PHP 1,617.1

PHP 284.9

17.6%

Plant Assets

2,952.8

2,526.9

425.9

16.9

Other Assets

5,513.8

742.0

4,771.8

643.1

Total Assets

10,368.6

4,886.0

PHP 5,482.6

112.2

PHP 2,017.6

PHP 2,482.3

PHP (274.7)

(11.1)%


ED

Current liabilities Long-term liabilities Total libailities

Retained earnings and other Treasury stock Total stockholders’ equity

7,289.5

1,506.2

5,783.3

384.0

9,497.1

3,988.5

5,508.6

112.2

195.3

205.8

(10.5)

(5.1)

1,013.3

1,065.7

(52.4)

(4.9)

(337.1)

(374.0)

36.9

9.9

871.5

897.5

(26.0)

(2.9)

P 10,368.6

P 4,886.0

P 5,482.6

112.2%

D EP

Stockholders’ equity Common stock

C O

PHP 1,902.0

Current Assets



ABC, INC. Condensed Balance Sheets December 31 (In millions) Increase (Decrease) during 2015 2015

Amount

PHP 6,954.7

PHP 1,898.6

Cost of goods sold

4,128.5

3,327.0

801.5

Gross Profit

4,724.0

3,627.7

1,097.1

Selling & Admin.

3,523.6

2,551.4

33.3

86.5

1,167.9

989.8

351.5

137.5

Income from operations Interest Expense Other income

ED

Nonrecurring charges

27.3% 24.1 30.2

C O

PHP 8,853.3

Net sales

Percent

PY

2014

972.2

38.1

(53.2)

(61.5)

178.1

18.0

214.0

155.6

(12.3)

15.4

(27.7)

(179.9)

Income before taxes

804.1

867.7

(63.6)

(7.3)

Income tax expense Net income

D EP

(expense), net

322.1

280.0

42.1

15.0

P 482.0

P 587.7

PHP (105.7)

(18.0)%


ABC, INC. Condensed Balance Sheets December 31 (In millions)

Assets

Amount

Current Assets

2014 Percent

Amount

PY

2015

Percent

18.3%

PHP 1,617.1

33.1%

Property Assets

2,952.8

28.5%

2,526.9

51.7%

Other Assets

5,513.8

53.2%

742.0

15.2

PHP 10,368.6

100.0%

PHP 4,886.0

100.0%

PHP 2,207.6

21.3%

PHP 2,482.3

50.8%

Long-term Liabilities

7,289.5

70.3%

1,506.2

30.8%

Total Liabilities

9,497.1

91.6%

3,988.5

81.6%

Total Assets

C O

PHP 1,902.0


Common stock

D EP


ED

Current liabilities

Retained earnings and other Treasury stock Total stockholders’ equity


195.3

1.9%

205.8

4.2%

1,013.3

9.8%

1,065.7

21.8%

(337.1)

(3.3)

(374.0)

(7.6)

871.5

8.4%

897.5

18.4%

PHP 10,368.6

100.0%

PHP 4,886.0

100.0%

*Percentages may be rounded up or down 111 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

ABC, INC. Condensed Income Statement For the Years Ended December 31 (In millions) 2015

Net sales

Percent

Amount

Percent

PY

Amount

2014

100.0%

PHP 6,954.7

100.0%

Cost of goods sold

4,128.5

46.6%

3,327.0

47.8%

Gross profit

4,724.8

53.4%

3,627.7

52.2%

Selling & admin.

3,523.6

39.8%

2,551.4

36.7%

33.3

0.4

86.5

1.3%

1,167.9

13.2%

989.8

14.2%

351.5

4.0%

137.5

2.0%

Income operations Interest expense

ED

Nonrecurring charges

C O

PHP 8,853.3

Other income

(12.3)

(0.1)

15.4

0.2

Income before income taxes

804.1

9.1%

867.7

12.4%

Income tax ex.

322.1

3.6%

280.0

4.0%

PHP 482.0

5.5%

PHP 587.7

8.4%

Net income

D EP

(expense), net

*Percentages may be rounded up or down


Below are the Statement of Financial Position and Statement of Result of Operation of JFC for the Years 2012 to 2014. Perform a Horizontal and Vertical analyses on both statements. 112 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

2014

2013

2012

ASSETS

Cash

7,618.0

9,903.0

8,848.0

Receivables

7,479.0

3,128.0

2,715.0

Inventories

5,972.0

3,560.0

2,630.0


2,952.0

1,793.0

1,430.0

24,012.0

18,384.0

15,623.0

13,363.0

11,772.0

11,059.0

3,410.0

3,353.0

13,324.0

12,517.0

30,097.0

27,642.0

54,118.0

46,026.0

41,768.0

6,576.0

6,007.0

4,714.0

182.0

155.0

79.0

865

-

-

11,468.0

9,457.0

11,828.0

19,091.0

15,619.0

16,621.0

Long-term Debt

716

4,063.0

855

Other Liabilities

6,234.0

2,984.0

2,561.0

6,950.0

7,047.0

3,416.0 113


TOTAL ASSETS LIABILITIES Current Liabilities Accounts Payable Income Tax Payable Short-term Debt Other current liabilities


TOTAL LIABILITIES

D EP

Financial Investments

3,139.0

11,947.0

26,145.0

ED

Property, plant, and equipment

C O

Non-current Assets

PY

Current Assets

This Teaching Guide 22,666.0 is a donation by CHED to DepEd. It is for reference purposes only. 26,041.0 20,037.0

2014

2013

2012

1,064.0

1,051.0

1,047.0


4,452.0

3,640.0

3,284.0

22,646.0

19,017.0

17,871.0

(84)

(347)

-471

TOTAL EQUITY

28,078.0

23,361.0

21,731.0


54,119.0

46,027.0

41,768.0

Sales Revenue

90,671.0

80,283.0

(73,728.0)

(65,285.0)

16,943.0

14,998.0

12,624.0

(10,806.0)

(9,067.0)

(8,279.0)

6,137.0

5,931.0

4,345.0

748.0

431.0

567.0

(126.0)

(116.0)

(51.0)

6,759.0

6,246.0

4,861.0

(1,271.0)

(1,523.0)

(1,149.0)

5,488.0

4,723.0

3,712.0


Cost of Sales/Service Gross Margin Operating Expenses

Other Income Other Expenses

D EP

Operating Profit

Net Income Before Tax Income Tax NET INCOME AFTER TAX

71,059.0

(58,435.0)

ED

Retained Earnings

C O

Capital stock

PY

EQUITY

Answer Key: Vertical Analysis: 114 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

2014

2013

2012

ASSETS

Cash

14.08%

21.52%

21.18%

Receivables

13.82%

6.80%

6.50%

Inventories

11.04%

7.73%

6.30%

5.45%

3.90%

3.42%

44.39%

39.94%

37.40%

24.69%

25.58%

6.30%

7.29%

24.62%

27.20%

55.61%

60.06%


Financial Investments Other non-current assets

TOTAL ASSETS

26.48% 7.52%

28.60%

62.60%

ED


C O

Non-current Assets

100.0%

100.0%

12.15%

13.05%

11.29%

0.34%

0.34%

0.19%

1.60%

0.00%

0.00%

21.19%

20.55%

28.32%

35.28%

33.93%

39.79%

Long-term Debt

1.32%

8.83%

2.05%

Other Liabilities

11.52%

6.48%

6.13%

12.84%

15.31%

115

48.12%

49.25%

47.97%

Current Liabilities Accounts Payable Income Tax Payable Short-term Debt Other current liabilities

D EP

100.0%

LIABILITIES

PY

Current Assets


TOTAL LIABILITIES

8.18%


2014

2013

2012

1.97%

2.28%

2.51%


8.23%

7.91%

7.86%

Retained Earnings

41.84%

41.32%

42.79%


-0.16%

-0.75%

-1.13%

TOTAL EQUITY

51.88%

50.75%

52.03%


100.0%

100.0%

100.0%

Sales Revenue

100.0%

100.0%


81.31%

81.32%

18.69%

18.68%

100.0% 82.23% 17.77%

ED

Gross Margin

C O

Capital stock

11.92%

11.29%

11.65%

6.77%

7.39%

6.11%

Other Income

0.82%

0.54%

0.80%

Other Expenses

0.14%

0.14%

0.07%

7.45%

7.78%

6.84%

1.40%

1.90%

1.62%

6.05%

5.88%

5.22%

Operating Expenses

D EP

Operating Profit


PY

EQUITY

Horizontal Analysis: 116 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

2014 Amount

2013 Percent

Amount

Percent

ASSETS Current Assets Cash

-23.07%

1,055.0

11.92%

Receivables

4,351.00

139.10%

413.00

15.21%

Inventories

2,412.00

67.75%

930.00

35.36%


1,159.00

64.64%

363.00

25.38%

5,637.00

30.66%

2,761.00

17.67%%


13.52%

713.00

6.45%

1.70%

214.00

6.82%

6.45%

570.00

4.77%

2,455.00

8.88%

1,497.00

5.73%

8,092.00

17.58%

4,258.00

10.19%

569.00

9.47%%

1,293.00

27.43%

27.00

17.42%

76.00

96.20%

2,011.00

21.26%

-2,371.00

-20.05%

3,472.00

22.23%

-1,002.00

-6.03%

Long-term Debt

-3,347.00

-82.38%

3,208.00

375.20%

Other Liabilities

3,250.00

108.91%

423.00

16.52%

TOTAL ASSETS LIABILITIES Current Liabilities Accounts Payable Income Tax Payable Short-term Debt Other current liabilities

807.00

ED


57.00

D EP

Financial Investments

1,591.00

C O

Non-current Assets

PY

-2,285.00

865.00


117

-97.00 -1.38% 3,631.00 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only. 106.29% TOTAL LIABILITIES

3,375.00

14.89%

2,629.00

13.12%

2014 Amount

2013 Percent

Amount

Percent

EQUITY Capital stock

1.24%

4.00

0.38

812.00

22.31%

356.00

10.84%

3,629.00

19.08%

263.00

-75.79%

TOTAL EQUITY

4,717.00

20.19%


8,092.00

17.58%

4,259.00

10.20%

Sales Revenue

10,388.00

12.94%

9,224.00

12.98%


-8,443.00

12.93%

-6,850.00

11.72%


Gross Margin Operating Expenses

Other Income Other Expenses


6.41%

124.00

-26.33%

1,630.00

7.50%

1,945.00

12.97%

2,374.00

18.81%

-1,739.00

19.18%

-788.00

9.52%

206.00

3.47%

1,586.00

36.50%

317.00

73.55%

-136.00

-23.99%

-10.00

8.62%

-65.00

127.45%

513.00

8.21%

1,385.00

28.49%

252.00

-16.55%

-374.00

23.55%

765.00

16.20%

1,011.00

27.24%

D EP

Operating Profit

1,146.00

C O

Retained Earnings

ED


PY

13.00


Business'Finance

110 MINS

Financial Planning Tools and Concepts pt.1 LESSON OUTLINE 20

Motivation

50

PY

Introduction Importance of planning /Review Formulation of an Event Plan

C O

Content Standards The learners demonstrate an understanding of the financial planning process, including budget preparation, cash management, and working capital management. Performance Standards The learners will be able to illustrate the financial planning process.

30

Enrichment Integration of Learning

10

Materials

ED

Learning Competency The learners shall be able to identify the steps in the financial planning process. (ABM_BF12-IIIc-d-10)

Instruction/ Steps of Financial Planning Delivery

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Specific Learning Outcomes The learners will be able to:

• Explain the importance of planning.

• Differentiate between strategic planning and tactical planning.

• Board notes • Play money • Cartolina • Colored Papers • Tape • Glue • Pencils • Markers

Resources

• Enumerate and apply the steps in planning.

(1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex Bookstore. (2) Gitman, L. J., & Zutter, C. J. (2012). Principles of Managerial Finance (13th ed.). USA: Prentice Hall.


INTRODUCTION (20 MINS) 1. Discuss the importance of Planning.

Teacher Tips

• Ask the learners how they see themselves five years from now. Write the answers on the board and tally repeating answers.

If the learners still do not know what they want five years from now, write “not sure”.

C O

PY

• Reveal that their answers are the long-term goals that they plan to achieve in the future. Tell the learners that in the activity you did, you have demonstrated that planning plays an important role in everyday life as the learners already have in mind a set of plans for the next five years. Tell them that even those who said they are not yet sure what they want five years from now will probably still have an idea of what kind of life they want. They are still in the process of planning.

ED

• Proceed to defining planning as suggested below: - Planning is an important aspect of the firm’s operations because it provides road maps for guiding, coordinating, and controlling the firm’s actions to achieve its objectives (Gitman & Zutter, 2012). - Management planning is about setting the goals of the organization and identifying ways on how to achieve them (Borja& Cayanan, 2015).

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• Continue by focusing on one example given by the learners. Suppose some of the students answered that in five years, they will be owners of a successful business. How will they be able to attain this goal? If they want to be able to be an owner of a successful business, they should first be able to set up one, or buy into one which would require capital. Hence, they must be able to raise the necessary funds. This new milestone is their short term goal. 2. Presentation of Relevant Vocabulary.

• There are two phases of financial planning. Financial planning starts with long term plans which would then translate to short term plans. • Strategic vs. Tactical Planning - Discuss the difference between Strategic and Tactical planning.


Teacher Tips Alternative Example: • Long term goal: Graduate from a university • Short term goal: Pass the college entrance exam

PY

• Long-term financial plans - These are a set of goals that lay out the overall direction of the company. - A long-term financial plan is an integrated strategy that takes into account various departments such as sales, production, marketing, and operations for the purpose of guiding these departments towards strategic goals. - Those long-term plans consider proposed outlays for fixed assets, research and development activities, marketing and product development actions, capital structure, and major sources of financing. - Also included would be termination of existing projects, product lines, or lines of business; repayment or retirement of outstanding debts; and any planned acquisitions(Gitman & Zutter, 2012).

Long-Term Planning

C O

• Short-term financial plans - Specify short-term financial actions and the anticipated impact of those actions. Part of short term financial plans include setting the sales forecast and other forms of operating and financial data. This would then translate into operating budgets, the cash budget, and pro forma financial statements (Gitman & Zutter, 2012). - For the purpose of this topic, emphasis will be made on short-term financial planning. Short Term Planning

More participation from top management

Top management is still involved but there is more participation from lower level managers (production, marketing, personnel, finance and plant facilities) because their inputs are crucial at this stage since they are the ones who implement these plans

Time Period

2 to 10 years

1 year or less

Level of Detail

Less

More

Focus

Direction of the company

Everyday functioning of the company

D EP

ED

Persons Involved

Table 1: Comparison of Short-Term and Long-Term Planning (Gitman & Zutter, 2012)


MOTIVATION (50 MINS) Teacher Tips If the teacher does not have enough funds to supply the materials, the teacher may change the materials or the learners may be asked to use their own materials as long as their simulated budget can cover the materials.

PY

1. Event Planning • Description of the Activity - This is a simulation of conducting a campaign event beginning from inception (planning stage) to actual performance (execution). - This will involve the facilitator role playing as provider of the goods and services needed, and the learners as the event coordinators and performers for the event (i.e. the learners will act as the celebrities/dancers/singers who are part of promoting the cause of the event.)

ED

C O

• Objectives - Inform the learners that this section aims to let them experience the planning process in a simple activity given a short amount of time and resources. - At the end of this activity, they will be able to: • Organize a small classroom event given the limited time and resources in the class. • Perform the functions of planning and implementing plans under a controlled set up. • Evaluate result of event based on a predetermined criteria (see Annex for Grading Rubrics). • Materials

Php 8 (or 4)

Bond Papers (5 pieces)

5

D EP

Cartolina (or 1/4 manila paper)

Colored Papers (or art paper)

10

Tape

5

Glue Pencils Markers

5

15 20

Pens

12

Crayons

20 PHP 100 122 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

• Mechanics - As facilitator, you will act the following roles: • Supplier of materials/paraphernalia to be used in the campaign. • Proprietor of the venues where the event will be held. • Talent manager of the special guests.

- All of the following should be present during the event proper:

ED

C O

PY

• Event title and campaign slogan (Example: Existence: Cut the Greed, Not the Green, a benefit concert to save endangered forests, featuring a performance from the XX group of dancers) • Campaign paraphernalia (posters/brochures) containing the following: ‣ Title of the event ‣ Date and time ‣ Campaign slogan ‣ Vision Statement (Example: To save the endangered Philippine Forest) ‣ Mission Statement (Example: To increase awareness of deforestation by organizing events that emphasize on tree planting) 3 • to 5 minutes informative presentation on the campaign. • 3 to 5 minutes production number (may be song, dance or any creative presentation) from the special guest (which will be role played by the learners). Back up performers may participate. • The informative presentation may be incorporated in the production number. Whole presentation should be 7 (min) to 10 (max) minutes.

Position

D EP

- Allow the students to assign themselves to perform the following functions: Description

Short Term Planning

Event Chairperson

Oversees the functions of the other committees. Must be able to set the overall direction of the group.

• Event title and slogan • Mission and vision of the campaign

Administrative Team

Responsible for other functions that the Event Chairperson deems necessary. This may include stage direction, event conceptualization, crowd control, backstage organizer, etc. 123


Description

Short Term Planning

Budgeting Team

Responsible for the allocation of the • Record of goods and services purchased given budget to purchase the necessary materials to make the event possible. • Documentation of timeline of activities done during the planning They will also negotiate with the and execution stage facilitator regarding prices of the required materials.

Production Team

Responsible for organizing the performances to be presented during the event. This includes role playing as the celebrities who will perform in the campaign event.

Marketing Team

Responsible for the presentation that would persuade the audience to join the campaign initiative.

Creatives Team

Responsible for the production of the campaign paraphernalia. The posters and brochures should be able to catch the attention of the target audience.

PY

Position

C O

• Song/dance number incorporated in the campaign • Not all need to present. Some may just choreograph.

D EP

ED

• Persuasive/informative speech incorporated in the campaign. May be done in between song/dance numbers Tip: Emphasize on the importance of • Not all need to present. Some may just formulate the script. the campaign, how the audience can be involved and what would they get from supporting the campaign. • Whole cartolina campaign poster • Whole bond paper campaign pamphlet

- In 20 minutes, the learners should be able to come up with an event to raise awareness of either of the following suggested issues: • • • • •

Proper Waste Segregation Anti-Smoking Campaign Barangay or Community Cleaning Dengue Prevention Community Image Improvement


- The following are available to them:

ED

C O

PY

• Venue ‣ Center of the Community Plaza – PHP150,000 (Restrictions: Performance must include singing) ‣ Concert grounds – PHP200,000 (Restrictions: None, any type of performance is allowed) ‣ School Auditorium – PHP100,000 (Restriction: Performance must include dancing) ‣ Basketball Court – PHP90,000 (Restriction: Performance must include a song and dance number) • Materials – may be used for posters, stage design, and other campaign paraphernalia. ‣ Cartolina – PHP50,000 each ‣ Marker – PHP10,000 each ‣ Pencil – PHP5,000 each ‣ Pens – PHP7,000 each ‣ Crayons – PHP5,000 each stick ‣ Tape – PHP8,000 per roll ‣ Glue/paste – PHP3,000 per bottle/tube ‣ Colored papers – PHP5,000 per piece ‣ Bond Papers – PHP10,000 per piece • Special Guest (to be role played by the learners from the productions team) ‣ Kathryn Bernardo and Daniel Padilla – PHP200,000 (Restrictions: None, may perform anywhere) ‣ Nadine Samonte and James Reid – PHP100,000 (Restrictions: Will not perform in a basketball court or school auditorium) ‣ Maine Mendoza and Alden – PHP150,000 (Restrictions: Will not perform in a basketball court) ‣ Jolina Magdangal and Marvin Agustin – PHP90,000 (Restrictions: Will not perform in a school auditorium)

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- Provide them with a budget of P 300,000.

2. Event Evaluation • At the end of the activity, summarize what the learners have done and integrate this to the objectives of the activity. Allow the students to reflect on the activity.


INSTRUCTION/DELIVERY (30 MINS) 1. Presentation of the Financial Planning Process. • From the event planning activity, the learners were able to experience an actual planning process. • Ask the learners to identify what are the steps they did in planning for their event.

PY

- Sample Answers:

• Identify the leader • Think of a slogan • Conceptualize an idea/design • Made a budget • Made the plan operational

ED

• Measuring the actual performance vis a vis the plans

C O

• Divide the group to different functions

• Inform the learners that the events they presented are a result of the planning process. • Continue discussing the planning process as follows:

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1) Set goals or objectives.

• For the activity done, the objective was to increase awareness of (chosen issue). • For corporations, long term and short term objectives are usually identified. These can be seen in the company’s vision and mission statements. The vision statement states where the company wants to be while the mission statement states the plans on how to achieve the vision. • Examples of a company’s Vision-Mission statements are as follows: Jollibee Foods Corporation (JFC)

Vision: To excel in providing great tasting food that meets local preferences better than anyone; To become one of the three largest and most profitable restaurant companies in the world by 2020. Mission: To serve great tasting food, bringing the joy of eating to everyone. 126 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

McDonalds Philippines Vision: First to respond to the fast changing needs of the Filipino family; First choice when it comes to food and dining experience; First mention as the ideal employer and socially responsible company; First to respond to the changing lifestyle of the Filipino family Mission: To serve the Filipino community by providing great-tasting food and the most relevant customer delight experience.

For the activity done, the resources the learners have are the following: • PHP 300,000 • Man power

PY

2) Identify Resources

C O

Resources include production capacity, human resources who will man the operations and financial resources (Borja & Cayanan, 2015). 3) Identify goal-related tasks

• For the activity done, the goal-related task is to prepare an event to increase awareness of (whatever issue you want).

ED

4) Establish responsibility centers for accountability and timeline. • Event Chairperson • Budgeting Team • Production Team • Marketing Team • Creatives Team • Administrative Team

D EP

For the activity done, there were different responsibilities formed as follows:

Also, there must be a timeline for the activities, especially since they were allotted a specific time to do the activity.


5) Establish the evaluation system for monitoring and controlling • For the activity done, the learners were given an expectation of their output and the teacher will grade them based on a predetermined criteria. Other evaluation for awareness events may be number of attendees, feedback, etc.

Teacher Tips This section is further discussed in the budgeting discussion proper.

PY

• For corporations, the management must establish a mechanism which will allow plans to be monitored. This can be done through quantified plans such as budgets and projected financial statements. The management will then compare the actual results to the planned budgets and projected financial statements. Any deviations from the budgets should be investigated. 6) Determine contingency plans

Teacher Tips

C O

• In planning, contingencies must be considered as well.

ENRICHMENT (10 MINS)

ED

• Budgets and projected financial statements are anchored on assumptions. If these assumptions do not become realities, management must have alternative plans to minimize the adverse effects on the company (Borja & Cayanan, 2015).

Recognize that this step is not done in the activity, but in reality, this is something that should be part of planning.

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1. Integration of learning. • Ask the learners the following: - Retell briefly the steps in Planning. - What is the difference between long term and short term goals?

2. Homework • Assign the students to read about budgeting and projected financial statements. Refer to the following references: - Business Finance (Cayanan and Borja): Chapter 3 - Principles of Managerial Finance (Gitman and Zutter): Chapter 4 3. Assign the case study in Appendix 2. • Have the learners form four groups. Each group will be working on the assigned case. • Assign two groups who will be the presenting groups and two who will be critic groups. 128 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Teacher Tips The case study is not meant to be solved yet but is given in advance to give the learners some ideas of what they are expected to cover the following meeting.

• The presenting groups will have a 20 minute class presentation followed by a 10 minute cross examination from the critic groups. Assign a critic group to each presenting group. They will be required to ask questions from the presenters. Appendix

Position

Description

Expected Output 4 - Outstanding

5 - Competent

2 - Emerging

1 – Needs Improvement

0 – Objectives not met

The event was carried out smoothly and the whole class was participative.

The event was carried out smoothly but there are members of the class that did not participate.

There were minor challenges during the presentations but the class made the effort to give a good presentation.

The event was carried out but the members of the class were only focusing on their own functions which did not translate to the whole.

There were a lot of disorder in the presentations and the members of the class have not been working together.

Leads discussions and made timely decisions.

Leads the discussions but was reluctant at making decisions.

Did not consistently engage in discussions but still had a final say on what to do.

Occasionally intervenes in the activity only when problems arises.

Watches and lets everyone else do their own job.

Present in coordinating the different functions and motivating the members of the class to work on 129 their functions.

Present in coordinating the different functions but allows other members of the class to slack off.

May occasionally lose focus on the direction of the functions.

Stopped working after expected output has been formulated.

No initiative to direct shown.

ED

Oversees the functions of the other committees. Must be able to set the overall direction of the group.

• Event title and slogan • Mission and vision of the campaign

D EP

Event Chairperson

Evaluation Critera

C O

On the whole

PY

Annex 1: Event Planning Evaluation Rubrics

Administrative Responsible for other Team functions that the Event Chairperson deems necessary. This may include stage direction, event conceptualization, crowd control, backstage organizer, etc.


Description

Expected Output

Evaluation Critera 4 - Outstanding

5 - Competent

2 - Emerging


Had a few delays on delivering the budget but was able to give what the other teams needed.

Wanted to cater to ALL needs of ALL teams which compromised deadlines.

Prepared No budgets but did documentation not show was presented. initiative to incorporate what other teams needed.

Provided a good presentation but time limit was not observed.

Provided a good presentation but some of the members did not participate.

Presented with a lot of flaws but made the effort to give the presentation.

Unable to present anything.

Spoke well but did not work within the time limit.

Provided a good presentation but some of the members did not participate.

Presented with a lot of flaws but made the effort to give the presentation.

Unable to present anything.

Responsible for the allocation of the given budget to purchase the necessary materials to make the event possible. They will also negotiate with the facilitator regarding prices of the required materials.

• Record of goods and services purchased • Documentation of timeline of activities done during the planning and execution stage

Was on time on creating the budget and organized in the documentation of the timeline of events.

Production Team

Responsible for organizing the performances to be presented during the event. This includes role playing as the celebrities who will perform in the campaign event.

• Song/dance number incorporated in the campaign

Was confident and entertaining and was able to present within the time limit.

Marketing Team

Responsible for the presentation that would persuade the audience to join the campaign initiative.

• Persuasive/ informative speech incorporated in the campaign. May be done in between song/ dance numbers • Not all need to present. Some may just formulate the script

ED

D EP

Tip: Emphasize on the importance of the campaign, how the audience can be involved and what would they get from supporting the campaign.

C O

Budgeting Team

PY

Position

Spoke loud and audibly to be able to catch the attention of listeners.



Expected Output

Responsible for the • Whole cartolina campaign poster production of the campaign paraphernalia. • Whole bond paper campaign The posters and brochures pamphlet should be able to catch the attention of the target audience.

Evaluation Critera 4 - Outstanding

5 - Competent

2 - Emerging



Materials were appealing and complete in all requirements .

Materials were appealing but incomplete.

Both materials were made but it wasn’t very appealing.

Only the poster or the pamphlet was made.

No campaign materials were made.

PY

Creatives Team

Description

C O

Position

Annex 2: Sweet Beginnings Co. Case Study

ED

Sweet Beginnings Co. is currently the most talked about clothing shop in town. Not only was the shop filled with customers every day, but they have been a major supplier of clothing to other shops. Ms. Muff, the owner of the shop has remained confident that the operations will go smoothly until one early morning when there had been problems with the delivery that was supposed to leave the shop. The clothes which were scheduled to be delivered were already packed and waiting on the loading bay. It was past 30 minutes of the scheduled delivery and no delivery truck was in sight. Ms. Muff decided to call the delivery contractor to find out what was taking the trucks so long.

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“You’ve been one month late from your scheduled payment for our delivery service,” the frustrated delivery contractor said. “We’ve been sending you notices every day for the past week and your company doesn’t seem to be responding. Unless you will be able to pay the amount due by this morning, we will not send any truck to deliver your goods. Ms. Muff was astounded to hear of the unpaid fee. To clear up the mishap, Ms. Muff hurriedly approached the company’s accountant, Mr. Phil in hopes of drawing cash from the company. Mr. Phil regrettably reported that the company does not have cash to pay the delivery contractor. In fact, the company has been consistently borrowing short term funds for three months from the start of the year. The company has yet to pay any of these borrowings and Mr. Phil informed Ms. Muff that the short term lenders have been reluctant to lend money at this point. As a result, the shipments will not be delivered to the customers until the company figures out how to pay their delinquency with the delivery contractors. The outside customers have been understanding enough to acknowledge that there will be a delay on the deliveries for this day. However, too much delay may frustrate these customers and may cause bad reputation to the company. Ms. Muff is looking into taking a loan 131 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

from Fresh Rural Bank to pay for the delinquent fees. The bank manager of Fresh Rural Bank has requested a meeting with Ms. Muff to discuss the financial condition of Sweet Beginnings Co. and plans for restoring its liquidity. Outraged, Ms. Muff told Mr. Phil, “Why don’t we have any balance in our cash account? Our company has been very profitable but we seem to be depending on loans to finance our operations. We need to figure out what is going wrong. Otherwise, we may lose our customers.”

PY

Company Background

Clothing Market

ED

C O

Sweet Beginnings Co. was founded in 20X0 as a manufacturer of summer clothes. The first shop was located near a calm beach with sky blue waters and powdery sands. Families and tourist would usually flock to the beach on summer weekends which gave the clothing shop foot traffic and gained the market’s attention. Due to its high quality products, the clothing store became a popular stop shop for vacation goers. In 20X1, a known blogger fancied the clothing line displayed in Sweet Beginnings and published an article promoting the shop. This earned the company nationwide publicity which led to other clothing stores offering shelf space for Sweet Beginning’s brand. In 20X3 it expanded its garment productions due to the increasing demand of their products. To this day, the company maintained its position as a summer clothing store since this line has brought its brand equity.

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The demand for clothing was characterized by a stable year-to-year growth. Unit demand increased with both population and individual income. However, the seasonal character of the company’s product has resulted to cyclical sales. Competition among other clothing shops in the town is unlikely to clash with the company’s sales growth. The company believes it will maintain its average growth rate for sales for the succeeding years. Sales Forecast

Sweet Beginnings Co. had been consistently profitable. Moreover, sales had grown at an annual rate of 18 percent in 20X5. Gross sales were projected to grow at 20% of the sales of the same months on the first quarter, 30% of sales of the same months on the second quarter and 25% of sales of the same months on the third and 4th quarter. This growth rate is expected to be constant until 20X8. 132 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Financial Information

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To prepare a forecast on a business-as-usual basis, Ms. Muff and Mr. Phil agreed on various parameters. Cost of goods sold would run at 73.7% of gross sales—a figure that was up from recent years because of increasing price competition. Operating expenses would be about 6% of sales —also up from recent years to include the addition of a quality-control department and two new sales agents. Depreciation is at 10% of cost of property, plant and equipment (PPE). Additions during 20X6 is expected to amount to PHP1,200,000 which will be paid on January 20X7. The Company’s policy is to expense full year’s depreciation on the date of purchase. The Company expects inventory level for 20X6 to be the same as 20X5.

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The company’s income tax rate was 30% paid for each quarter in May, August, November, and April of the following year, respectively. The company opts to use optional standard deduction of 40% from the company’s gross profit to arrive at the taxable income for the quarter. The delivery contractor’s fee (at 3% of sales) was collected at the loading gate as trucks left to make deliveries to customers. Ms. Muff proposed to pay dividends of PHP450,000 per quarter. For years Sweet Beginnings had paid high dividends.

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Mr. Phil observed that sales collections in any given month had been running steadily at the rate of 40% of the last month’s sales plus 60% of the sales from the month before last. The value of raw materials paid in any month represented on average 55% of the value of sales expected to be made two months later. Wages and other expenses in a given month were equivalent to about 34% of purchases in the previous month. As a matter of policy, Ms. Muff wanted to see a cash balance of no less than PHP640,000.

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Sweet Beginnings Co. had a line of credit from Fresh Rural Bank, where it also maintained its cash balances. Fresh Rural Bank’s short-term interest rate was currently 16%. Return on investment for short term investments is at 12%.


Historical Information Sweet Beginnings Co. Historical Income Statements

Sweet Beginnings Co. Balance Sheet December 31, 20X5

Problem

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Sweet Beginnings Co. Monthly Sales 2015

Ms. Muff needs to prove that the company will be liquid enough to pay for its loans with Fresh Rural Bank so that it will be allowed to ask for another loan to meet the delivery contactor’s fee. How should Ms. Muff explain to First Rural Bank that the company is in a good financial position? Moreover, should the company prove to have financial liquidity problems, what can to company do to cope with their need for cash?


Learner’s Guide 1. Assume that you are Ms. Muff and you will be presenting to the Fresh Rural Bank. Convince the bank that you are in a good financial position evidenced by your cash budget and projected financial statements.

3. The following table format may be used for the cash budget: Jan

Feb

…

Nov

Less: Purchase of Raw Materials Less: Payment for Salaries and Wages Less: Payment to Delivery Contractors

Net Cash Flow Add: Beginning Cash

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Less: Required Ending Balance

Total

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Less: Dividends Paid Less: Income Tax Paid

Dec

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Cash Receipts From Collections

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2. Prepare a monthly cash budget for Sweet Beginnings Co. for the year ending December 20X6. Start with the monthly sales forecast (Tip: Forecast sales up to Feb 20X7).

Add: Return on Investment (12%)

Less: Interest on Borrowing (16%) Less: Repayment of Principal

Add: Liquidation of Investment Required Financing Excess Cash


Jan Loan Balance - Beginning

Feb

…

Nov

Dec

Total

587,575

Add: Required Financing

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Less: Repayments

Investment Balance - Beginning Add: Excess Cash

Investment Balance - End

4. Forecast Financial Statements. Start with income statement.

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Less: Liquidations

Total of monthly forecasted sales

Cost of goods

73.7% of Sales

Gross profit 3% of sales

Operating expenses

6% of sales

Depreciation Interest expense Pretax profit Income tax

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Delivery Fees

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Gross Sales

10% of Total PPE cost

Total of Interest from borrowings and return of investment from cash budget

Gross profit x (1-40%) x 30%

Net profit


5. Forecast Financial Statements. Start with income statement. Required cash balance

Accounts receivable

Accounts receivable beginning + Sales - Collections from Customers

Inventories

Same as last year

Short term investments

Resulting balance from cash budget

Total current assets Beginning balance + current year additions


Beginning balance + depreciation expense

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Gross plant, property and equipment

Net PPE Total Assets

Accounts payable 20X5 + Purchases* + Operating Expense - Cash payment for raw materials - Cash Payment for Salaries and Wages

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Accounts payable

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Cash

*Purchases = Cost of goods sold + Inventory 20X6 – Inventory 20X5 Resulting balance from cash budget

Payable to PPE supplier

Additions to PPE payable on January 20X7

Accrued taxes Total current liabilities Owners’ equity Total liabilities and equity

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Short term borrowings

Tax payable for the last quarter

Owners’ Equity 20X5 + Net Income - Dividends paid


Format of Paper/Presentation Prepare a paper containing the following: 1. Letter to Fresh Rural Bank explaining that the company is in a healthy financial position and has capacity to pay loans when they come due. 2. Cash Budget for 20X6 in good form. 3. Projected Financial Statements for 20X6 in good form.

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4. Supporting computations.

Prepare a 20-minute presentation using the following outline

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Presenting Group

• Case Background: Brief explanation of the problem of the Company.

• Methodology: Explain why the cash budget and projected financial statements was made in order to help the company in their dilemma. • Budgets and Projections: Present the resulting budgets and implications of the figures that were derived. Explain in class how you were able to derive your figures.

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Critic Group

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• Conclusion: Was the company performing well based on the budgets and projections and will it be able to sustain its operations?

Take the point of view of Fresh Rural Bank. From the presentation of Budgets and Projections, ask questions that will challenge the presenting group’s conclusions. The critic may also ask clarifications on the presentation or comment on how differently they did their analysis.


Business'Finance

375 MINS

Financial Planning Tools and Concepts pt. 2 LESSON OUTLINE 15

Motivation

15

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Introduction Review of the Financial Planning Process /Review

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Content Standards The learners demonstrate an understanding of the financial planning process, including budget preparation, cash management, and working capital management.

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Performance Standards The learners will be able to prepare budgets such as projected collection, sales budget, production budget, projected statement of comprehensive income, projected statement of financial position, and projected cash flow statement.

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Learning Competency The learners shall be able to illustrate the formula and format for the preparation of budgets and projected financial statements. (ABM_BF12-IIIcd-11)

Planning and Controlling

Instruction/ Budgeting and Financial Statement Practice Projection a. b. c. d. e. f.

Evaluation

235

Sales Forecast (20 mins) Production Forecast (30 mins) Operations Forecast (5 mins) Cash Budget (75 mins) Uncertainties in the Cash Budget (45 mins) Projected Financial Statements (60 mins)

Preparing a Budget and Projected Financial Statements Case Presentation

100

Enrichment Integration of Learning

Specific Learning Outcomes The learners will:

Materials

• Know and apply the tools used in planning and forecasting. • Know and apply the tools used in budgeting.

Board materials

Resources (1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex Bookstore. (2) Gitman, L.J., & Zutter, C.J. (2012). Principles of Managerial Finance. (13th ed.). USA: Prentice Hall. 139


10

INTRODUCTION (15 MINS) • Review the Financial Planning Process. • Recall that the financial planning process involves setting up long term and short term goals.

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- Long term goals set the direction of the company. - Short term goals are the specific steps or actions that will ultimately reach the company’s long term goals.

• Recall the steps in planning as follows: A. Set goals or objectives.

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B. Identify Resources. C. Identify goal-related tasks.

D. Establish responsibility centers for accountability and timeline.

E. Establish the evaluation system for monitoring and controlling.

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F. Determine contingency plans.

• Inform the learners that for the rest of the sessions, they will learn how to establish the evaluation system of monitoring and controlling. • Characteristics of an Effective Plan.

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• In planning, the goal of maximizing shareholders’ wealth must always be put in mind. • The following criteria may be used for effective planning:

-

Specific – target a specific area for improvement.

Measurable – quantify or at least suggest an indicator of progress. Assignable – specify who will do it.

Realistic – state what results can realistically be achieved, given available resources. Time-related – specify when the result(s) can be achieved. (Doran, G. T. (1981). "There's a S.M.A.R.T. way to write management's goals and objectives". Management Review (AMA FORUM) 70 (11): 35–36.)


MOTIVATION (15 MINS) Planning and Controlling 1. Recall the previous class activity. Ask the students one of the most important activities they have done in the previous exercise.

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• Tell the students that a plan is useless if it is not quantified. A quantified plan is represented through budgets and projected or pro-forma financial statements.

• These budgets and pro-forma financial statements are useful for controlling. They serve as the bases for monitoring actual performance.

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• Tell the students that meeting the plans is good. However, failing to meet the plans is not equivalent to failure if the reasons for not meeting such plans can be justified especially when the reasons are fortuitous in nature and are beyond the control of management. - Measuring actual performance vis a vis the plans even at the early start of the year allows the management to assess the company’s performance and come up with remedial actions if warranted (Cayanan, 2015).

INSTRUCTION/PRACTICE (205 MINS) 1. Sales Budget

On asking what the most important activity done in the previous class activity, the teacher should be able to lead the answers to Budgeting.

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2. Get insights from the learners on the following questions: - What is a budget? - What is the importance of a budget? - What will happen if the budget is not met?

Teacher Tips

• Discuss how a sales budget is formulated.

- The most important account in the financial statement in making a forecast is sales since most of the expenses are correlated with sales.

- Recall from Lesson 2: Financial Statement analysis that cost of sales ratio, gross profit ratio, and 141 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Get at least two to three insights from the learners. Relate their answers to the class activity done taking note what should happen or what could have happened based on their answers.

variable operating expenses ratio are based on the sales figure.

- Given the importance of the sales forecast, the financial manager must be able to support this figure with reasonable assumptions. The following external and internal factors should be considered in forecasting sales: Internal

• Gross Domestic Product (GDP) growth rate • Inflation • Interest Rate • Foreign Exchange Rate • Income Tax Rates • Developments in the industry • Competition • Economic Crisis • Regulatory Environment • Political Crisis

• production capacity • man power requirements • management style of managers • reputation and network of the controlling stockholders • financial resources of the company

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External

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Table 1: Factors that Influence Sales

• Discuss the following external and internal factors influencing sale, among others:

- Macroeconomic Variables (external)

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Macroeconomic variables such as the GDP rate, inflation rate, and interest rates, among others play an important role in forecasting sales because it tells us how much the consumers are willing to spend. A low GDP rate coupled by a high inflation rate means that consumers are spending less on their purchases of goods and services. This means that we should not forecast high sales of the periods of low GDP.

- Developments in the Industry (external)

Products and services which have more developments in its industry would likely have a higher sales forecast than a product or service in slow moving industry. Consumer trends are always changing, thus the industry should be competitive to be able to appeal to more customers and stay in the market.

- Competition (external)

Suppose you are selling bread and you know that each person in your community eats an average of one loaf of bread a day. The population of your community is 500 people. If you are the only person selling bread in your town, then your sales forecast is 500 units 142


of bread. However, you also have to take account your competition. What if there are 4 other sellers of bread? You will need to have to divide the sales between the 5 of you. Does this mean your new forecast should be 100 units of bread? Not necessary. You should also know the preference of your consumers. If more of them would prefer to buy more bread from you, then you should increase your sales forecast.

- Production Capacity and man power (internal)

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Suppose that you have already evaluated the macroeconomic factors and identified that there is a very strong market for your product and consumers are very likely to buy from you. You forecasted that you will be able to sell 1,000 units of your product. However, you only have 20 employees who are able to produce 20 units each. Your capacity cannot cover your expected demand hence, you are limited by it. To be able to increase capacity, you should be able to expand your operations.

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• Discuss the implications if sales budget is not correct. If understated, there can be lost opportunities in the form of forgone sales. If it is too optimistic, the management may decide to unnecessarily increase capacity or hire more employees and end up with more inventories. 2. Production Budget • Discuss what a production budget is and how it is formulated.

- A production budget provides information regarding the number of units that should be produced over a given accounting period based

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on expected sales and targeted level of ending inventories.

- It is computed as follows

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Required production in units = Expected Sales + Target Ending Inventories - Beginning Inventories Note: Ending inventory of current period is beginning inventory of next period.

• Provide the following example (EASY):

- [A] Company forecasts sales in units for January to May as follows: Jan

Units

2,000

Feb

Mar 2,200

Apr 2,500

May 2,800


3,000

-

Moreover, [A] Company would like to maintain 100 units in its ending inventory at the end of each month. Beginning inventory at the start of January amounts to 50 units. How many units should [A] Company produce in order to fulfill the expected sales of the company? Answer Key: MONTH

Target level of ending inventories Total Less: beginning inventories Required production

2,000

2,200

100

100

2,100

2,300

50

2,050

Apr

May

2,500

2,800

100

100

2,600

2,900

100

100

100

2,200

2,500

2,800

Total

3,000 12,500 100

100

3,100 12,600 100

50

3,000 12,500

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3. Budgeting Cash

Mar

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Projected Sales

Feb

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Jan

• Discuss what an Operation Budget is and how it is formulated.

- Operations budget refers to the variable and fixed costs needed to run the operations of the company but are not directly attributable to the generation of sales.

• Rent payments

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- Examples of this are the following:

• Wages and Salaries of selling and administrative personnel • Administrative Costs

• Travel and representation expenses • Professional fees • Interest Payments • Tax Payments


4. Cash Budget • Discuss the importance of a Cash Budget and how it is formulated.

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• Recall from the start of the term the exercise you did where the learners were asked how much allowance they were given and how much expenses they would incur in a day. Recall that at the end of the activity, they were able to identify whether they had excess cash or they had a deficit. • Relate that this is what the cash budget aims to do.

- For a business enterprise, having the right amount of cash is important since cash is used to make payments for purchases, for operational expenses, to creditors, and for other transactions.

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- The cash budget forecasts the timing of these cash outflows and matches them with cash inflows from sales and other receipts. The cash budget is also a control tool to monitor the way the company handles cash.

• Below is the general form of the Cash Budget:

Jan

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CASH BUDGET Feb

…

Nov

Dec

Total

xxx

…

xxx

xxx

xxx

xxx

…

xxx

xxx

xxx

xxx

Less: Cash Disbursements

xxx

Net Cash Flow

xxx

xxx

…

xxx

xxx

xxx

Add: Beginning Cash

xxx

xxx

…

xxx

xxx

xxx

Ending Cash

xxx

xxx

…

xxx

xxx

xxx

Required Ending Cash Balance

xxx

xxx

…

xxx

xxx

xxx

Required total financing

(xxx)

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Cash Receipts

Excess cash balance

… xxx

…

(xxx) xxx

xxx


Teacher Tips The cash budget, or cash forecast, is a statement of the firm’s planned inflows and outflows of cash. It is used by the firm to estimate its short-term cash requirements, with particular attention being paid to planning for surplus cash and for cash shortages (Gitman & Zutter, 2012).

• The following are the steps in formulating a cash budget: A. Form the sales forecast, identify how much would be collected in the cash budget period. Sales may be made in cash or for credit. Cash sales are translated to cash at the point of sale while credit sales are collected depending on the credit period. Credit periods may range from 10 days to more than a month depending on the strategy of the company. Recall from Lesson 2: Financial Statement Analysis the implications of the company’s credit policy.

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- Continuing from previous example, assume selling price is PHP100/unit. Sales for each month are expected to be collected as follows:

‣ 2 months after sales: 30% - How much is total receipts from sales (DIFFICULT)?

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‣ Month of sales : 20% ‣ A month after sales: 50%

Jan Units

Collection from current months sales

Collection from previous months sales

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Apr

May

2,500

2,800

200,000

220,000

250,000

280,000

44,000

50,000

56,000

60,000

250,000

100,000

110,000

125,000

140,000

150,000

60,000

66,000

75,000

84,000

40,000 144,000 220,000 247,000 275,000

926,000

40,000

3,000

Examples: interest received

12,500

300,000 1,250,000

B. Identify other receipts.

‣ ‣ ‣ ‣ ‣

Total

2,200

Collection from two months prior sales Total Collections from Sales

Mar

2,000

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Sales in Pesos

Feb

return on principal investments

proceeds from sale of non-operating assets issuance of capital stock proceeds from borrowings 146 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

- Add these receipts to the collections from sales to get to total receipts. C. From the Production Budget, identify how much of the purchases made will be paid by the company on the cash budget period. Like sales, purchases may be made in cash or on credit depending on the supplier’s credit terms.

Jan Required production

Feb

Cost in Peso

102,500

Payment from current months sales Payment from previous months sales

Apr

2,500

May

Total Payments for Purchases

Total

2,800

3,000

12,550

110,000

125,000

140,000

150,000

627,500

102,500

110,000

125,000

140,000

477,500

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Payment from two months prior sales

2,200

Mar

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2,050

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- Continuing from previous example: ‣ Assume that cost per unit is PHP50. ‣ All purchases this month are paid the following month. How much is total cash disbursements for purchases (AVERAGE)?

0 102,500 110,000 125,000 140,000

150,000

477,500

D. From the operations budget, identify which expenses will be paid in cash during the cash budget period.

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- The following expense items will be paid based on the following periods:

‣ Rent payments: Rent of PHP5,000 will be paid each month. ‣ Wages and salaries: Fixed salaries for the year are PHP96,000, or PHP8,000 per month. Wages are estimated as 10% of monthly sales. ‣ Tax payments: Taxes of PHP25,000 must be paid in April. E. Identify all other cash payments to be made.

- Examples:

‣ Fixed-asset purchases in cash ‣ Cash dividend payments ‣ Principal Payments 147 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

‣ Repurchase of common stock ‣ Purchase of stock/bond investments

- It is important to recognize that depreciation and other noncash charges are NOT included in the cash budget. - The following items will be paid based on the following periods: ‣ Fixed-asset outlays: New machinery costing PHP130,000 will be purchased   and paid for in April.

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‣ Interest payments: An interest payment of PHP10,000 is due in May. ‣ Cash dividend payments: Cash dividends of PHP20,000 will be paid in January. ‣ Principal payments (loans): A PHP20,000 principal payment is due in February.

Total Payments for Purchases

-

Feb

Mar

Apr

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Jan

May

Total

102,500

110,000

125,000

140,000

477,500

5,000

5,000

5,000

5,000

5,000

25,000

Wages

20,000

22,000

25,000

28,000

30,000

125,000

Salaries

8,000

8,000

8,000

8,000

8,000

40,000

Tax Payment Fixed Asset Outlay

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Interest Payment

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Rent Payments

Cash Divident

25,000

130,000

130,000 10,000

20,000

Principal Payment

Total Cash Disbursements

25,000

10,000 20,000

20,000 53,000 157,500 148,000 321,000 193,000

20,000 872,500

F. Match the receipts and disbursements on the periods they become collectible and payable, respectively. G. Set a minimum required cash balance. This balance is maintained in case contingencies arise. Recall from the steps in planning that we should also plan for contingencies. 148 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

H. If the net cash flow is above the minimum cash balance, the company is in excess cash and may consider putting it in short term investments. If it is below, the company should make a short term borrowing during that period.

- Moreover, [A] Company has a beginning cash balance of PHP80,000 and would like to maintain an ending cash balance of PHP100,000 per month. Prepare [A] Company’s Cash Budget for January to May. Prepare a cash budget (DIFFICULT). Feb

40,000

Cash Receipts

Mar

Apr

May

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Jan

144,000

220,000

247,000

275,000

Total 926,000

(53,000) (157,500) (148,000) (321,000) (193,000) (872,500)

Net Cash Flow

(13,000)

(13,500)

72,000

(74,000)

82,000

53,500

Add: Beginning Cash

80,000

67,000

53,500

125,500

51,500

80,000

Ending Cash Balance

67,000

53,500

125,500

51,500

133,500

133,500

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Less: Cash Disbursements

Less: Minimum Cash Balance

(100,000) (100,000) (100,000) (100,000) (100,000) (100,000)

Cumulative excess cash balance (Cumulative required financing)

(33,000)

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(46,500)

- Evaluating the Cash Budget:

25,500

(48,500)

33,500

33,500

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‣ If the ending cash balance after payment of all required disbursements is less than the required ending balance, the company needs to borrow additional cash from short term borrowings to meet its required ending balance. Should the ending cash balance exceed the company’s minimum cash requirement the next period, the company may be able to repay the loan plus accrued interest. ‣ Should the Company have excess cash above its required maintaining cash balance, the company may invest this cash on short term investments so that it will have an opportunity to earn additional profits. If the company’s cash balance would then fall below its minimum cash requirement, the company may withdraw the investment to be able to meet the required cash balance. 5. Projected Financial Statements (60 mins)

• Discuss the purpose of projected financial statements.


- Projected financial statements is a tool of the company to set an overall goal of what the company’s performance and position will be for and as of the end of the year. It sets targets to control and monitor the activities of the company. The following reports may be forecasted:

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‣ Projected Income Statement ‣ Projected Statement of Financial Position ‣ Projected Statement of Cash Flows • Provide the learners a historical financial statement that they would use to make their forecast. You may use your own set of financial statements or the one found below.

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[A] Company Income Statements For the years ended December 31 2013

2012

2011

2010

Net Sales

5,250,000

4,770,000

4,310,000

3,910,000

3,547,000

Cost of sales

4,305,000

3,959,100

3,663,500

3,128,000

2,979,480

945,000

810,900

646,500

782,000

567,520

Operating expenses

314,750

297,890

246,231

221,500

217,538

Operating income

630,250

513,010

400,259

560,500

349,982

Interest Expense

250,000

250,000

250,000

450,000

300,000

Income before taxes

380,250

263,010

150,259

110,500

49,982

Taxes

114,075

78,903

45,078

33,150

14,995

Net Income

266,175

184,107

105,181

77,350

34,987

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Gross Profit

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2014


[A] Company Statement of Financial Positions As of December 31 2014

2013

Cash

1,060,000.00

990,000.00

Receivables

2,300,500.00

Inventories Other current assets

2012

2011

2010

770,000.00

760,000.00

880,000.00

1,921,000.00

1,722,000.00

1,454,000.00

1,396,000.00

4,850,000.00

4,500,000.00

3,797,000.00

3,290,000.00

3,350,000.00

1,050,000.00

980,000.00

984,000.00

735,000.00

998,000.00

9,260,500.00

8,391,000.00

7,273,000.00

6,239,000.00

6,624,000.00

2,440,000.00

2,260,000.00

1,810,000.00

1,870,000.00

1,900,000.00

835,689.00

925,681.00

896,842.00

876,235.00

827,490.00

3,275,689.00

3,185,681.00

2,706,842.00

2,746,235.00

2,727,490.00

266,175.00

184,107.00

105,181.00

77,350.00

34,987.00

5,050,000.00

4,756,000.00

4,130,000.00

3,300,000.00

2,870,000.00

28,520.00

19,725.00

11,270.00

8,290.00

3,750.00

2,250,000.00

2,500,000.00

1,000,000.00

2,000,000.00

2,000,000.00

85,600.00

28,700.00

40,990.00

30,688.00

37,890.00

7,414,120.00 151 7,304,425.00

5,182,260.00

5,338,978.00

4,911,640.00

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Current Assets

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Assets

Total Current Assets Non-current Assets

Other noncurrent assets Total non-current assets

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Total assets

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Property, plant, and equipment, net

Liabilities and Equity Current Liabilities

Notes payable (external funds needed) Trade payables

Income taxes payable

Current portion of long-term debt Other current liabilities


2014

2013

2012

2011

2010

1,000,000.00

3,000,000.00

6,338,978.00

7,911,640.00

Non-current Liabilities Long-term debt, net of current portion Total liabilities

1,250,000.00 -

2,000,000.00 9,414,120.00

8,554,425.00

5,182,260.00

Capital stock

1,000,000.00

1,000,000.00

1,000,000.00

1,000,000.00

1,000,000.00

Retained earnings

2,122,069.00

2,022,256.00

3,797,582.00

1,646,257.00

439,850.00


3,122,069.00

3,022,256.00

4,797,582.00

2,646,257.00

1,439,850.00


12,536,189.00 11,575,681.00

8,985,235.00

9,351,490.00

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9,979,842.00

Income Tax Expense

Finance Cost

Operating Expense

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Earnings Cost of Sales

• Enumerate and discuss the Steps on Financial Statement Projection.

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100

a. Forecast Sales.

- Reiterate the importance of Sales

75

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in forecasting financial statements. Recall from lesson 2: Financial Statement Analysis that most of the income statement items are related to sales.

- Recall the financial ratios related to sales and show how they are related to each other as follows:

50

25

0

Sales

Gross Profit

152

Operating Profit Earnings Before Tax


Net Income

- Start the exercise in financial statement projection with the Projected Income Statement. Provide the information below.

PY

Sales are expected to increase by 10% in 2015 from the 2014 sales level. This growth assumption is based on the assessment of the external and internal factors related to the Company and the historical growth of the company. The company’s sales grew by 10.3% annually from 2010 to 2014.

- Ask the learners to prepare pro-forma financial statements without numbers. The blank spaces will be filled as the steps on financial statement projections are discussed. the board.

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- Flash an excel file of the blank FS on the screen if there are available facilities. Otherwise a set of blank pro-forma FS can be written on [A] Company Projected Income Statement For the year ending December 31 xxx

ED

Net Sales

xxx

Gross Profit

xxx

Operating expenses

xxx

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Cost of sales

Operating income

xxx

Interest Expense

xxx

Income before taxes

xxx

Taxes

xxx

Net Income

xxx


[A] Company Projected Statement of Financial Position December 31, 2015

[A] Company Projected Statement of Financial Position December 31, 2015 Non-current liabilities

Current Assets

Long-term debt, net of current portion

xxx

Receivables

xxx

Inventories

xxx

Other Current Assets

xxx

Total Current Assets

xxx

Non-current assets xxx


xxx

Total non-current assets Total Assets

Capital stock


xxx


xxx

D EP xxx

Notes payable (external funds needed)

xxx

Trade payables

xxx

Income taxes payable

xxx

Current portion of long term debt

xxx

Other current liabilities

xxx xxx

xxx xxx

xxx

Current liabilities

xxx

Retained earnings

xxx

Liabilities and Equity

xxx


ED

Property, plant, and equipment, net

Total liabilities

C O

Cash

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Assets

154


- Compute for projected sales. Projected Sales in 2015 = 5,250,000 x (1 + 10%) = 5,775,000 b. Forecast Cost of Sales and Operating Expenses

- In determining the cost of sales and operating expenses, variable and fixed costs should be identified. - Cost of sales are direct costs associated in the generation of sales. One way of projecting cost of sales is using the cost of sales ratio.

PY

Companies would generally have a consistent historical cost of sales ratio. The company may use this as a starting point.

- Suppose that the company has an average of 60% cost of sales ratio. In doing projections, the financial manager may use the same average ratio or, if the company is pushing for efficiency, the financial manager may reduce this ratio to say 57% depending on his judgment.

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- Operation costs are a mix of variable and fixed costs. Variable costs usually vary with sales. To project these costs, the percentage of sales method may be used. On the other hand, fixed costs remain the same no matter how the volume of sales has changed. The Company wants to maintain the same gross profit per year as 2014.

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Variable operating expense is 5% of sales.

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Depreciation expense is 5% of the gross beginning balance of property, plant and equipment. As of December 31, 2014, the gross balance of PPE is PHP5,200,000. For January 2015, PHP1,000,000 new PPE will be acquired. It is the policy of the company that PPE acquired in the first half of the year will be depreciated for one full year.

- Compute for Cost of Sales, Variable Operating Expense, and Depreciation Expense. Cost of sales percentage in 2014

=

4,305,000 ÷ 5,250,000) x 100%

Cost of sales percentage in 2014

=

82%

Projected cost of sales in 2015

=

82% x 5,775,000

Projected cost of sales in 2015

=

4,735,500

Variable (5% x Sales of 5,775,000)

288,750

Fixed (depreciation expense) 155 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

(5,200,000 + 1,000,000) x 5%

310,000

Total operating expenses

598,750

- Compute for net PPE. PPE net, beginning Less: Depreciation PPE net, end

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1,000,000 (310,000) 3,130,000

c. Forecast Net Income and Retained Earnings.

C O

Additions

2,440,000

- To forecast net income, interest expense and income tax expense should also be considered using the relevant interest and tax rates.

Retained earnings is arrived at by adding projected net income to beginning retained earnings then deducting dividends to be declared during the year.

ED

- Just note this information. Return to this when all income statement items are complete.

Income tax rate is 30% of the income before taxes. 75% of the income tax expense will be paid in 2015 while the balance will be paid in 2016.

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d. Determine balance sheet items that will vary with sales or whose balances will be highly correlated to sales.

- Balance sheet items that may vary with sales or will be highly correlated with sales are cash, accounts receivable, inventories, accounts payable, and accrues expenses payable.

- Compute as follows:

The following financial statement accounts are expected to vary with sales based on the 2014 financial statements:

A. Cash B. Trade accounts receivable 156 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

C. Inventories D. Other current assets E. Trade accounts payable Cash =

( 1,060,000 ÷ 5,200,000) x 100%

Cash as a percentage of sales in 2014

=

20.19%

Projected cash in 2015

=

20.19 % x 5,775,000

Projected cash in 2015

=

1,165,973

Accounts receivable as a % of sales in 2014 = Accounts receivable as a % of sales in 2014 =

C O

Accounts receivable

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Cash as a percentage of sales in 2014

(2,300,500 ÷ 5,200,000) x 100% 43.82%

=

43.82% x 5,775,000

Projected accounts receivable in 2015

=

2,530,605

Inventories as a % of sales in 2014

=

( 4,850,000 ÷ 5,200,000) x 100%

Inventories as a % of sales in 2014

=

92.38%

Projected inventories in 2015

=

92.38% x 5,775,000

Projected inventories in 2015

=

5,334,945

ED

Projected accounts receivable in 2015

D EP

Inventories


Other current assets as a % of sales in 2014 =

(1,050,000 ÷ 5,200,000) x 100%

Other current assets as a % of sales in 2014 =

20%

Projected other current assets in 2015

=

20% x 5,775,000

Projected other current assets in 2015

=

1,155,000 157


Accounts payable Accounts payable as a % of sales in 2014

=

(5,050,000.00 ÷ 5,200,000) x 100%

Accounts payable as a % of sales in 2014

=

96.19%

Projected accounts payable in 2015

=

96.19% x 5,775,000

Projected accounts payable in 2015

=

5,554,973

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e. Determine payment schedule for loans.

- Compute for interest expense:

As of December 31, 2014, there are two long-term loans. Both have an annual interest rate of 8%.

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A. The first loan will mature on June 30, 2015 and the remaining principal balance to be paid on June 30, 2015 is PHP1,250,000. B. The second loan which was incurred on December 31, 2014 is paid at the rate of PHP500,000 principal balance every June 30 and December 31.

ED

New loans of PHP3,500,000 will be incurred on December 31, 2015 payable at the rate of PHP500,000 every June 30 and December 31. Annual interest rate is expected at 8%. First Loan

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Interest from January 1 to June 30, 2015 1,250,000 x 8% x (6 mos ÷ 12 mos)

50,000

Second Loan

Interest from January 1 to June 30, 2015

(1,000,000 + 2,000,000) x 8% x (6 mos ÷ 12 mos)

120,000

Interest from July 1 to December 31, 2015

100,000

(500,000 + 2,000,000) x 8% x (6 mos ÷ 12 mos) Total interest expense for 2015

270,000 158


- Complete projected income statement as follows: [A] Company Projected Statement of Profit or Loss For the year ending December 31 5,775,000

Cost of sales

4,735,500

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Net Sales

Gross Profit

1,039,500

598,750

Operating expenses

440,750

Interest Expense

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Operating income

270,000

Income before taxes Taxes

170,750 51,225

Net Income

ED

- Compute for Income Tax Payable.

119,525

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Projected Income Tax Payable in 2015: 51,225 x (1 – 75%) = 12,806

- Compute for current and non-current portion of long term assets: Loan

Current Portion

Long-term Portion

Total

Loan incurred on December 31, 2014 of PHP3 million

1,000,000

1,000,000

2,000,000

Loan of PHP3.5 million to be incurred on December 31, 2015

1,000,000

2,500,000

3,500,000

Total

2,000,000

3,500,000

5,500,000


f.

Check for other information Cash dividends of PHP300,000 will be paid for 2015. Other non-current assets and other current liabilities will remain unchanged.

2,122,069

Add: Net Income

119,525

Less: Dividents

(300,000)

Retained earnings, end

1,941,594

ED

g. Determine external funds needed (EFN).

C O

Retained earnings, beginning

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- Compute for retained earnings

h. Determine how external funds needed may be financed.

- External Funds Needed is a plug figure to make projected assets equal projected liabilities and shareholders’ equity.

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EFN = change in total assets – (change in total liabilities + total change in stockholders’ equity) Or

EFN = Squeeze figure to balance assets to Liabilities and equity 2015 Balances Without EFN

2014 Balances

Change

Total assets

14,152,212

12,536,189

1,616,023

Total liabilities

11,153,379

9,414,120

1,739,259

2,941,594

3,122,069

(180,475)

Total stockholders' equity EFN

57,239 160 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

- Ask the learners what the implication of a positive or negative EFN is. - Suggested discussion: ‣ A positive value for EFN, means that the company needs more funds equivalent to the positive value of EFN. As to how this will be

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raised depends on the management and the company’s ability to access funds. This EFN can be raised in the form of short term borrowing, long term borrowing or equity, or a combination of all sources. The projected balance sheet which generated this EFN is just the first iteration in preparing a pro-forma balance sheet.

‣ A negative value for EFN, means that the company has excess cash. As to how this excess cash will be distributed will be the subject

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of the next iteration for the pro-forma balance sheet. This can be disposed by adding it to the projected cash balance or it can be used to retire some of the debt if pre-termination is allowed.

- Complete FS as follows:

Assets Current Assets 1,165,973

Receivables

2,530,605

Inventories Other Current Assets Total Current Assets Non-current assets

Property, plant, &equipment, net Other non-current assets Total non-current assets Total Assets

5,334,945 1,155,000

10,186,523


Liabilities and Equity

Non-current liabilities

Current liabilities

Long-term debt, net of current portion

Notes payable (external funds needed)

D EP

Cash


ED


57,239

Total liabilities 5,554,973

Trade payables

12,806

Income taxes payable Current portion of long term debt Other current liabilities

2,000,000 85,600

3,130,000

7,710,618

11,210,618

Stockholders’ equity Capital stock

1,000,000

Retained earnings

1,941,594


2,941,594


835,689 3,965,689 13,152,212

3,500,000

161


13,152,212

- Prepare the projected statement of cash flows. Follow the discussion. [A] Company Projected Statement of Cash Flows For the Year Ending December 31, 2015

Cash flows from financing activities

Payment of cash dividents

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Cash flows from operating activities

[A] Company Projected Statement of Cash Flows For the Year Ending December 31, 2015

170,750

Income before taxes Adjustments:

Short-term notes payable (EFN)

Depreciation

310,000

57,239

Loans, net of payments

1,250,000

Cash flows from financing activities

1,007,239

C O

Changes in the following accounts

(300,000)

Decrease (Increase) in accounts receivable

(230,105)

Net change in cash

Decrease (Increase) in inventories

(484,945)

Cash, beginning

1,060,000

Decrease (increase) in other current assets

(105,000)

Cash, ending

1,165,973

Increase (decrease) in accounts payable

ED

504,973

Increase (decrease) in other current liabilities

-

(66,939)

Income taxes paid

D EP

Cash flows from operating activities

Cash flows from investing activities Acquisitions of PPE

Acquisition of other non-current assets Cash flows from investing activities

98,734

(1,000,000)

-

(1,000,000)


105,973

EVALUATION (100 MINS) 1. Case Study Introduction (10 minutes) • The learners were given a copy of a case before the discussion of cash budgets and projected financial statements began. • Provide a brief summary of the case and explain what is required to be submitted and presented in class.

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2. Case Presentation (60 minutes) • The presenting groups will have a 20 minute class presentation followed by a 10 minute cross examination from the critic groups. • Assign a critic group to each presenting group. They will be required to ask questions to the presenters. Let the second presenting group leave the room while the first presenting group is doing their presentation. All groups are required to submit their papers.

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3. Case Discussion (30 minutes) • Reveal to the class any oversight they may have made in analyzing the case. Discuss corrections and additional solutions. See Annex 1 for suggested solutions.

Integration of Learning:

ED

ENRICHMENT (5 MINS)

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Ask the learners the following: What should the management do if the actual performance of the company fell short of the plans as early as in the first quarter? Suggested Answer: Try to identify the sources of the differences, whether these are beyond or within the control of the management. Whatever the causes are, remedial actions should have to be taken. Or depending on the circumstance, the plans may have to be adjusted.


Appendix ANNEX 1: Sweet Beginnings Co. Suggested Solution Jan

Feb

Mar

Apr

May

June

1,361,240

2,035,060

3,008,340

6,193,650

10,617,680

13,449,060

Sales Forecast 20X6

1,633,488

2,442,072

3,610,008

8,051,745

13,802,984

17,483,778

Sales Forecast 20X7

1,960,186

2,930,486

Cash receipts from sales two months before (60%)

1,433,388

1,167,942

980,092.80 1,465,243.20 2,166,004.80

4,831,047

778,628

653,395

976,829

1,444,003

3,220,698

5,521,194

2,212,016

1,821,337

1,956,922

2,909,246

5,386,703

10,352,241

1,985,504

4,428,460

7,591,641

9,616,078

8,577,092

4,318,964

456,667

675,071

1,505,676

2,581,158

3,269,466

2,916,211

49,005

73,262

108,300

241,552

414,090

524,513

C O

Cash receipts from sales last month (40%) Cash Receipts From Collections Less: Payment for purchase of Raw Materials

Less: Dividents Paid

Net Cash Flow Add: Beginning Cash

(279,161)

(3,355,456)

641,123

640,000

640,000

640,000

640,000

640,000

(640,000)

(640,000)

(640,000)

(640,000)

(640,000)

(640,000)

D EP

Less: Income Tax Paid

ED

Less: Payment for Salaries and Wages Less: Payment to Delivery Contractors

Less: Required Ending Balance


Less: Interest on Borrowing (16%)

PY

Sales 20X5

-

450,000

(7,834.33)

1,321,900

363,835

(7,698,696) (10,851,442)

(7,237,780)

2,142,552

(11,645.96)

450,000

(56,540.65)

(159,943.81)

-

(306,762.29)

(407,356.18)

Less: Repayment of Principal

(1,735,195)

Add: Liquidation of Investment Required Financing Excess Cash

(285,872)

(3,367,102)

(7,755,237) (11,011,386)


(7,544,542) -

Jan

Feb

Mar

Apr

Loan Balance - Beginning

(587,575)

(873,447)

(4,240,549)

(11,995,786)


(285,872)

(3,367,102)

(7,755,237)

(11,011,386)

(873,447)

Loan Balance - End

(4,240,549)

-

-

Add: Excess Cash

-

-

Less: Liquidation of Investment

-


-

(23,007,172)

June (30,551,714)

(7,544,542) -

(23,007,172)

1,735,195 (30,551,714)

(28,816,518)

-

-

-

-

-

-

-

-

C O

Investment Balance - Beginning

(11,995,786)

-

PY

Less: Repayments

May

-

-

-

-

-

-

-

-

-

D EP

ED

-


ANNEX 1: Sweet Beginnings Co. Suggested Solution Jul

Aug

Sep

Oct

Nov

Dec

Total

Sales 20X5

12,475,770

6,282,130

3,539,230

3,008,340

2,388,980

1,946,570

66,306,050

Sales Forecast 20X6

15,594,713

7,852,663

4,424,038

3,760,425

2,986,225

2,433,213

84,075,350

8,281,790.40

10,490,266.80

9,356,827.50 4,711,597.50 2,654,422.50 2,256,255.00

49,794,878

6,993,511

6,237,885

3,141,065

1,769,615

1,504,170

1,194,490

33,435,483

15,275,302

16,728,152

12,497,893

6,481,213

4,158,593

3,450,745

83,230,361

Cash receipts from sales last month (40%) Cash Receipts From Collections Less: Payment for purchase of Raw Materials

2,433,221

Less: Payment for Salaries and Wages

1,468,448

Less: Payment to Delivery Contractors

467,841

C O

Cash receipts from sales two months before (60%)

PY

Sales Forecast 20X7

Less: Dividents Paid

2,068,234

1,642,424

1,338,267

1,078,102

1,611,768

46,689,754

827,295

703,199

558,424

455,011

366,555

15,783,183

235,580

132,721

112,813

89,587

72,996

2,522,261

450,000

1,800,000

ED

450,000

1,862,285

Less: Income Tax Paid

4,867,453

10,905,792

11,734,758

9,569,548

4,471,709

1,216,460

949,426

11,567,710

640,000

640,000

640,000

640,000

640,000

640,000

641,123

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Net Cash Flow

1,319,433

(640,000)

(640,000)

(640,000)

(640,000)

(640,000)

(640,000)

26,747

71,732

84,614

183,092

Add: Beginning Cash Less: Required Ending Balance


(640,000)

-

-

-

Less: Interest on Borrowing (16%)

(384,220.24)

(243,932.63)

(90,721.62) -

Less: Repayment of Principal

(10,521,571)

(11,490,826)

(6,804,121)

-

(1,668,958)

-

(587,575)

Add: Liquidation of Investment Required Financing

-

-

Excess Cash

2,674,705

4,498,456


1,288,192

1,034,040

9,495,393

Jan

Feb

(28,816,518)


-

Less: Repayments

(18,294,947) -

10,521,571

June

(6,804,121) -

-

-

-

-

-

6,804,121 -

-

-

-

-

-

11,490,826

(18,294,947)

Loan Balance - End

May

-

(6,804,121) -

-

-

Add: Excess Cash

-

-

Less: Liquidation of Investment

-


-

-

2,674,705

C O

Investment Balance - Beginning

-

-

2,674,705

7,173,161

8,461,353

4,498,456

1,288,192

1,034,040

2,674,705

D EP

ED

-

Apr

PY

Loan Balance - Beginning

Mar


7,173,161

8,461,353

9,495,393

ANNEX 1: Sweet Beginnings Co. Suggested Solution Income Statement

Computation 84,075,350

Gross Sales Cost of Goods

84,075,350 x 73.70%

61,963,533

Gross Profits

PY

22,111,817 2,522,260.50

Delivery Fees

84,075,350 x 3.00%

Operating Expenses

84,075,350 x 6.00%

Depreciation

9,896,000 x 10.00%

Interest Expense

Return on Investment + Interest on borrowings

5,044,521

C O

989,600

1,485,866

12,069,570

Pretax profit Income Tax

22,111,817 x (1-40%) x 30%

Net profit

3,980,127

ED

8,089,443

Computation

Cash

Ending balance of cash budget

Accounts receivable

3,379,958 + 84,075,350 - 83,230,361

4,224,948

Same as last year

1,076,000

From cash budget

9,495,393

Inventories Short term investments Total Current Assets

D EP

Balance Sheet

640,000

15,436,340

Gross plant, property, and equipment

8,696,000 + 1,200,000

9,896,000


1,278,500 + 989,600

2,268,100

Net PPE Total Assets

7,627,900 168

23,064,240


Balance Sheet

Computation

Accounts payable

654,234 + 61,963,533* + 5,044,521 46,689,754 - 15,783,183 -

Payable to PPE supplier

Cost to be paid for purchase equipment

Accrued taxes

9,179,863 x (1-73.7%) x (1-40%) x 30%

434,575

6,823,926

Total current liabilities

9,950,872 + 8,089,443 - 1,800,000

16,240,315

C O

Owners equity

1,200,000

PY

Short term borrowings

5,189,351

23,064,240

1,076,000

Add: *Purchases

61,963,533

Less: Inventory 20X6

1,076,000

Cost of goods sold

61,963,533

D EP

Inventory 20X5

ED



Business'Finance

180 MINS


Motivation

20

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Introduction Communicate the learning objectives /Review

C O

Content Standards The learner demonstrates and understanding of the financial planning process including budget preparation, cash management, and working capital management. Performance Standards The learner will be able to describe concepts and tools in working capital management.

ED

Learning Competency The learner shall be able to describe the concepts and tools in working capital management. (ABM_BF12-IIIc-d-12)

Instruction/ Discussion Proper Delivery

90

Practice

20

Seatwork

Enrichment Group work Materials


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Present Actual Company Financial Statements

• Calculator • Computer • Internet Connection • LCD Projector • Manila Paper • Pens

• Understand working capital management, net working capital, and the related trade-off between profitability and risk.

Resources

• Appreciate working capital financing policies and their effects on the profitability and risk of the company.

(1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex Bookstore.

• Compute and analyze the effects of an operating cycle and cash conversion cycle on the working capital requirements of the company,


30

INTRODUCTION (10 MINS) Communicate the learning objectives by asking a learner to read the following aloud in class:

Teacher Tips

1. I will be able to understand working capital management, net working capital, and the related trade-off between profitability and risk.


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2. I will be able to describe the cash conversion cycle, its funding requirements, and the key strategies for managing it.

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1. Give an example of a local Philippine company and its working capital practices.

Jollibee Foods Corporation Statements of Financial Position As of December 31, 2014 (In Millions of PHP)

Cash and cash equivalents Accounts receivable, net Inventories Other current assets Total current assets

7,618

D EP

Current assets

ED

Sample:

7,621 5,972

2,810

24,021

Noncurrent assets

30,097

Total assets

54,119


Teacher Tips You can choose a local company that the learners’ are familiar with. The purpose of this exercise is to expose the learners to a real world example. The learners should be guided on the importance of working capital on the daily operations of a business enterprise.

Current liabilities

Other current liabilities

12,515

Total current liabilities

19,091

Noncurrent liabilities

6,950 26,041

Total equity

28,078


54,119

C O

Total liabilities

PY

6,576

Trade payables

ED

2. Ask the students: What are the assets needed by Jollibee for its daily operation? 3. Cross reference the students’ answers with the Statement of Financial Position of Jollibee.


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Discuss the following financial planning tools and concepts:

1. Introduce the different Working Capital Assets and their important in the operations of the company. • Working capital is the company’s investment in current assets such as cash, accounts receivable, and inventories. • Net Working capital is the difference between current assets and current liabilities. 2) Illustrate the flow of the operating cycle.


Teacher Tips Relate the classification of the working capital assets to operations. You can discuss and differentiate the classification of the same assets as classified in the statement of financial position. You may relate your discussion with the financial ratios topic.

PY C O

ED

• The operating cycle is the sum of days of inventory and days of receivables. 3) Explain how to compute the Days of Inventory and Days of Receivables.

• Days of Inventory or inventory conversion period or average age of inventories, is the average number of days to sell its inventory.

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- A DSI of 20 days means that on the average it takes 20 days to sell its inventory. The formula is: - Since the Statement of Financial Position tells the financial condition of a company at the end of the period, we take Average Inventory for the year in our calculation.

Days of Inventory =

*Inventory Turnover =

365 (or 360) days Inventory Turnover* Cost of Goods Sold

Beginning Inventory + Ending Inventory 2

Or, this formula can be used without computing for inventory turnover: 173 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Days of Inventory =

Average Inventory Average COGS per day

• Days of Sales Outstanding (DSO) is the average time for the company to collect its receivables.

*Receivable Turnover =

365 (or 360) days Receivable Turnover*

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Days of Inventory =

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- For example, a DSO of 40 days means that a customer who purchased on the company on account will pay his/her balance in 40 days. - The formula is:

Net Credit Sales

Beginning Accounts Receivable + Ending Accounts Receivable 2

cash sales from the total sales figure.

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- Revenue is from the Statement of Comprehensive Income and Accounts Receivables is from the Statement of Financial Position. - We use the Average Receivables for the year in our calculation. For revenue we generally use the credit sales so we may have to exclude

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4) Discuss how to compute Cash Conversion Cycle (CCC).

• Cash Conversion Cycle, also called the net operating cycle, is computed as the operating cycle less days of payable.

- In formula form:

Cash Conversion Cycle = Operating Cycle - Days of Payables

Cash Conversion Cycle = (Days of Inventory + Days of Receivables) - Days of Payables

- The Cash Conversion Cycle is the length of time it takes for the initial cash outflows for goods and services purchased (materials, labor, etc.) to be realized as cash inflows from sales (cash sales and in the collection of receivables).


• Days of Payables Outstanding (DPO) is the average number of days for the company to pay its creditors. A DPO of 30 days means that the company waits for 30 days before paying its creditors.

- The formula for DPO is:

365 (or 360) days

Days of Inventory =

Ending Balance Sheet Accounts such as Ending Accounts Receivable can also be used in the computation of Turnover ratios however, consistency must be applied.

Net Credit Purchases

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Payables Turnover*

*Payables Turnover =

Beginning Accounts Payables + Ending Accounts Payables 2

taken from the Statement of Financial Position.

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- Purchases are taken from the Statement of Comprehensive Income and Accounts Payables are

- Since the Statement of Financial Position tells the financial condition of a company at the end of the period, we take Average payables for the year in our calculation.

- For purchases we are generally concerned about the credit purchases so the learner may have to

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exclude cash purchases from the total sales figure. NUMERATOR

DENOMINATOR

Inventory Turnover

Cost of Goods Sold

Average Inventory

Receivables Turnover

Net Credit Sales

Average Receivables

Net Credit Purchases

Average Payables

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FORMULA

Payables Turnover

Teacher Tips

- We can see that the numerators of the turnovers needed for the computation of cash conversion cycle are all Income Statement Accounts, while the denominators are all Average Balance Sheet Accounts.

- Graphical Representation


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Figure 1: Corelation of the Operating Cycle and Number of Days

Also, there must be a timeline for the activities, especially since they were allotted a specific time to do the activity.

CCC = 20 + 40 – 30 = 30

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• Using the above figures, the CCC will be:

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30 days is the time between the cash outlay and the cash received.

If the CCC is negative, it indicates that the company has excess cash to invest. A CC of -10 indicates that the company has excess cash to invest for 10 days. 5) Discuss the different working capital policies:

• Working Capital Management is the administration and control of the company’s working capital. The primary objective is to achieve a balance between profitability and risk. Basically, there are three types of working capital financing policies the management can choose from:

- Maturity-matching working capital financing policy - Aggressive working capital financing policy


Teacher Tips It should be noted that as the operating cycle and cash conversion cycle increase, more funds are tied up in the working capital accounts.

- Conservative working capital financing policy • Managing working capital is important because failure to do so may result in the closure of business.

- It must be noted that working capital requirements increase as the size or volume of the business increases. - For example, a company needs PHP10 million in working capital to support an annual sales of PHP50 million. If the sales increase to PHP100 million, will the PHP10 million working capital be enough? Most likely, the answer is no.

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• Why? Because with PHP100 million sales, there will be more cash needed for the operations, more accounts receivable, and if the company is a trading or a manufacturing company, more inventories. 6) Define Permanent and Temporary Working Capital.

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• Permanent Working Capital is the minimum level of current assets required by a firm to carry-on its business operations given its production capacity or relevant sales range.

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• Temporary working capital is the excess of working capital over the permanent working capital given its production capacity or relevant sales range. (Source: Learn Accounting with Online Accounting Course | Simplestudies.com. (2016). Simplestudies.com. Retrieved 13 May 2016, from http://simplestudies.com/what-are-the-types-of-working-capital)

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• During the year, sales are not the same every month. This is why companies have slack season and peak season. If a company has annual sales of PHP50 million, chances are these sales are not generated uniformly throughout the year. Given this situation, the net working capital requirements during the slack season is lower than those during the peak season. The net working capital needed to support an operation during the slack season represents the permanent working capital requirements while the additional net working capital needed during the peak season represents the temporary working capital requirements. • Illustrative Sample: Bugay is managing the working capital of SR Ice Cream. SR Ice Cream is engaged in the selling of different ice creams. The following are the sales volume, and the working capital needed based on the recent years: QUARTER

SALES

WORKING CAPITAL

PHP200,000

PHP120,000

2nd (April to June)

PHP900,000

PHP300,000

3rd (July to September)

PHP750,000

PHP250,000

4th (October to December)

PHP350,000

1st (January to March)

PHP150,000

177


- We can see that the working capital never goes below PHP120,000. That is the permanent working capital requirement. - The maximum temporary working capital is PHP180,000 (difference between the PHP300,000 working capital and the permanent working capital of PHP120,000) at the peak season with PHP900,000 sales level. For the 4th Quarter, the temporary working capital is PHP30,000 (difference between the PHP150,000 working capital and the permanent working capital of PHP120,000).

7) Explain the Working Capital Financing Policies. • Financing policies can either be aggressive, conservative or maturity-matching:

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- Maturity-matching working capital financing policy

• Based on the maturity-matching working capital financing policy, permanent working capital requirements should be financed by longterm sources while temporary working capital requirements should be financed by short-term sources of financing.

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• Long-term sources of financing include long-term debt and equity such as common stock and preferred stock. Short-term sources include short-term loans from a bank.

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• These short-term loans from banks are called working capital loans which perfectly describe the reasons why these loans are incurred.

Source: Cayanan and Borja. Business Finance. 2016.


• In maturity-matching, all permanent working capital must be financed by long-term sources while temporary working capital requirements should be financed by short-term sources.

- Aggressive Working Capital Financing Policy

• Under the aggressive working capital financing policy, some of the permanent working capital requirements are financed by short-term sources of financing.

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• Why do managers of some companies adopt this policy? It is because long-term sources of funds have higher cost as compared to shortterm sources of financing. By financing some of the permanent working capital requirements with short-term sources of financing, financing cost is minimized which in turn, improves net income.

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• But what is the trade-off? Since it is short-term, the debt has to be paid soon and the company may not yet have enough cash by the time the debt matures. This refers to liquidity risk and this risk increases with the aggressive working capital financing policy.


- Conservative Working Capital Financing Policy

• Based on the conservative working capital financing policy, even some of the temporary working capital requirements are financed by long-term sources of financing. • This policy minimizes liquidity risk but it also reduces the company’s profitability because long-term sources of financing entail higher cost. 179 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

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QUARTER

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• Illustrative Sample: B. Bugay is managing the working capital of SR Ice Cream. SR Ice Cream is engaged in the selling of different ice creams. The following are the sales volume, and the working capital needed based on the recent years: SALES

WORKING CAPITAL

PHP200,000

PHP120,000

2nd (April to June)

PHP900,000

PHP300,000

3rd (July to September)

PHP750,000

PHP250,000

4th (October to December)

PHP350,000

PHP150,000

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1st (January to March)

The following banks offered the following loans:


TERM (OR DURATION)

AMOUNT

BPI

3 years

PHP40,000 - PHP90,000

BDO

5 months

PHP25,000 - PHP60,000

AUB

4 years

PHP90,000 - PHP150,000

PNB

9 months

PHP65,000 - PHP105,000

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BANK

What banks will be probably chosen by B. Bugay when choosing different policies?

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Answer Key: Permanent working capital = P120,000

Temporary working capital = P300,000 – P 120,000 = P180,000 TEMPORARY

PERMANENT

Maturity-Matching

BDO, PNB

AUB, BPI

BDO, PNB

All banks are considered

All banks are considered

AUB, BPI

Aggressive

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Conservative

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POLICY

8) Explain the strategies for managing the cash conversion cycle. • The central issue in managing the working capital is the ability to reduce operating cycle days. This is to ensure that such operating cycle days will be shorter than the payable days. The quickness of completing the operating cycle is measured by the operating cycle days. • The following are some of the strategies in efficiently managing the cash conversion cycle: 1. Turn over inventory as quickly as possible without stockouts that result in lost sales. 2. Efficiently manage the accounts receivable consistent with the company’s credit policies. You need to also consider accelerating the collection of receivables through: A. Shorter credit terms. B. Offering special discounts to customers who pay their accounts within a specified period. 181 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

C. Speeding up the mailing time of payments from customers to the firm. D. Minimizing the float or reducing the time during which payments received by the firm remain uncollected funds. For example, a customer deposited a check in the name of the company on a Friday and the check will be cleared on Monday. The payment is said to be floating for two days. 3. Manage mail, processing, and clearing time to reduce them when collecting from customers and to increase them when paying suppliers.

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4. Pay accounts payable as slowly as possible without damaging the firm’s credit rating.

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PRACTICE (20 MINS)

1. Calculate the firm’s operating cycle. 2. Calculate the firm’s cash conversion cycle.

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Philippine Products Company is concerned about managing cash efficiently. On the average, inventories have an age of 90 days and accounts receivable are collected in 60 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales of about PHP30 million. Assume there is no difference in the investment per peso of sales in inventory, receivables, and payables and that there is a 360-day year.

Answer Key: 1. 90+60=150 days 2. 90+60-30=120 days

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3. Discuss how management might be able to reduce the cash conversion cycle.

3. Reduce days to sell inventory, reduce days to collect accounts receivable and lengthen payable payment period without negatively affecting relationship with suppliers.



Teacher Tips

As a group work, ask the learners to download the financial statements of Jollibee Foods Corporation.

Make sure that all members of the group participate in the discussion and no one dominates the discussion.

Reflection questions:

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1. What is the impact of the working capital management to the profitability and risks based on the group’s analysis of Jollibee Foods Corporation financial statements? 2. What types of working capital policies is JFC using based from your analysis of it’s financial statements? 3. What impact can you observe this strategy has to JFC's profits?

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4. Is there any effect on the riskiness such as liquidity or solvency? Notes:

• Remind the groups to have a “Group Facilitator” who will direct the discussion.

• Allow them to discuss for ten (10) minutes.

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• Remind the groups to have a “Scribe/Reporter” who will write the key concepts shared by each member and report the group’s findings to the class.

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• Ask each group to share their findings to the class for 2 minutes per group.


Business'Finance

180 MINS


Motivation

20

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Introduction Communicate the learning objectives /Review Real life situational analysis

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Content Standards The learner demonstrates and understanding of the financial planning process including budget preparation, cash management, and working capital management. Performance Standards The learner will be able to describe concepts and tools in working capital management.

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Learning Competency The learners shall be able to explain the tools in managing cash, receivables, and inventory. (ABM_BF12-IIIc-d-12)

Instruction/ Discussion Delivery

90

Enrichment Group work

30

Evaluation

30

Materials

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Specific Learning Outcomes At the end of this lesson, the learners will be able to explain how to manage cash, accounts receivables, and inventories.

Quiz • Calculator • Computer • Internet Connection • LCD Projector • Manila Paper • Pens

Resources (1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex Bookstore.


INTRODUCTION (10 MINS) Communicate the learning objectives by asking a learner to read the following aloud in class:

Teacher Tips

1. List the reasons for holding cash.


2. Construct a cash budget and explain its purpose. 3. Briefly explain useful tools and procedures for effectively managing cash inflows and outflows. 5. Identify and briefly explain the use of several inventory control systems.

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4. State the goal of inventory management and identify the three categories of inventory costs.

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6. List and explain the four elements of a firm’s credit policy and identify other factors influencing credit policy.


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You are to organize your birthday celebration this year. What are the things that should be considered in planning? List on the board the needed resources that will be needed for the birthday celebration.

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Based on the listings the learners made, separate the current assets and long term assets then relate them to the need of working capital assets in any activity.

INSTRUCTION/DELIVERY (120 MINS) 1. Cash

• Being the most liquid asset, cash is an important account in the balance sheet that will affect the liquidity, and solvency of a company. It is also the most vulnerable when it comes to theft. • A good internal control must be properly implemented to safeguard this asset:

- A basic internal control system entails the assignment of custodial function and recording function

to separate individuals, unless you are the owner. Why is this so? Imagine a cashier of a company who is also the chief accountant. If tempted, this person can steal cash from the company and can 185


Teacher Tips This exercise is geared toward letting the learners relate common activities and the need of working capital for these activities.

manipulate the records so that nobody can discover that he is stealing. If you are the owner, you probably will not steal from yourself and adjust the records?

- Cash collections should be supported by official receipts which are summarized in a daily

collection report. The daily collection report is going to useful for the next control measure for cash – depositing collections.

- A good internal control over cash is by depositing all collections intact. The daily collection reports

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are now compared with the deposit slips to find out if all collections are indeed deposited.

- If all collections need to be deposited, then payments must be made through a check voucher system. There must also be two signatories in the check to provide a check and balance. If the business is small then the entrepreneur’s signature may suffice.

- For small payments like the fare given to a messenger, a petty cash fund is used. A petty cash fund

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which should be minimal in amount, will be issued to a petty cash fund custodian, say the office administrator. The petty cash fund may be PHP10,000 or PHP20,000. Disbursements from this petty cash funds must be supported by a petty cash voucher signed by the recipient of the petty cash. When the petty cash fund is almost depleted, the petty cash fund custodian will get reimbursements. This reimbursement will go through the check voucher system where the custodian gets a check with the petty cash vouchers as supporting documents.

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- The check must also be cross-checked by drawing two lines on the payee section of the check. This cross-checking requires depositing of a check. It cannot be encashed. This makes it more difficult for somebody who stole a check to get the money.

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2. Motives For Holding Cash

• The following are the reasons for holding cash:

- Primary Reasons

a. Transactional. This is the cash used for paying expenses such as salaries, utilities, rent and taxes, among others. b. Compensating balance. This is the cash held to meet bank requirements such as the minimum cash balance you maintain for checking accounts and if you have existing loans, banks may also require a minimum amount of deposit with them.

- Secondary Reasons

a. Precautionary. This is the cash maintained for emergencies such as the additional cash you 186 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Teacher Tips Relate the classification of the working capital assets to operations. You can discuss and differentiate the classification of the same assets as classified in the statement of financial position. You may relate your discussion with the financial ratios topic.

keep during political and economic uncertainties. For example, if your business requires a substantial amount of importation, a relatively higher amount of cash has to be maintained when the exchange rate becomes highly volatile due to political instability such as what happened during EDSA II.

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b. Speculative. This refers to the cash held by the company to take advantage of opportunities (e.g. buying stocks during major corrections such as what happened at the height of the global financial crisis in 2008 and 2009 where stock valuations went down by as much as 80% for some companies). 3. Budgeting Cash

Teacher Tips

• The Cash Budget

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- The cash budget provides information regarding the company’s expected cash receipts and disbursements over a given period.

- It is useful for identifying future funding requirements or excess cash within a given period. This

allows managers to find possible sources of financing if the cash budget shows cash shortage or identify appropriate tenors for money market placements for excess cash.

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- Normally, a cash budget is prepared for a one year period broken down into smaller intervals like months. This allows managers to see the seasonality of the business which affects the cash flows.

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B. BUGAY INDUSTRIES Cash Budget For the months of October, November, and December 2015 OCTOBER

NOVEMBER

DECEMBER

Cash Receipts Less: Cash Disbursements

xxx (xxx)

xxx (xxx)

xxx (xxx)

Net Cash Flows

xxx

xxx

xxx

Add: Beginning Cash Balance

xxx

xxx

xxx

Ending Cash

xxx

xxx

xxx

Less: Minimum cash balance

(xxx)

(xxx)

(xxx)

Cumulative financing requirement (if negative) or Cumulative excess cash balance (if positive)

xxx

xxx

xxx

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Money market placements refer to shortterm financial instruments with a maximum tenor of one year.

• Basically, cash budget has the following parts:

- Cash Receipts include all of a firm’s inflows of cash in a given financial period. The most common components of cash receipts are cash sales, collections of accounts receivable, and other cash receipts.

- Illustrative Example:

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Source: Gitman, L. (1976). Principles of managerial finance. New York: Harper & Row.

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B. Bugay Industries, a defense contractor, is developing a cash budget for October, November, and December. Jungaya’s sales in August and September were PHP100,000 and PHP200,000 respectively. Sales of PHP400,000, PHP300,000, and PHP200,000 have been forecast for October, November, and December respectively. Historically, 20% of the firm’s sales have been for cash, 50% have generated accounts receivable collected after 1 month, and the remaining 30% have generated accounts receivable collected after 2 months. In December, the firm will receive a PHP30,000 dividend from stock in a subsidiary.

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Required: Prepare the cash receipts section of the cash budget. Answer Key: Forecasted sales

Collection of AR 1st month (50%) 2nd month (30%)

200,000

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Cash Sales (20%)

100,000

August

September

P20,000

P40,000

P50,000

400,000

October

300,000 November

December

P80,000

P60,000

P40,000

P100,000

P200,000

P150,000

P30,000

P60,000

P120,000

Other cash receipts TOTAL CASH RECEIPTS

200,000

P30,000 P210,000

P320,000

P340,000


- Cash Disbursements include all outlays of cash by the firm during a given financial period. The most common cash disbursements are: • Cash purchases • Purchasing fixed assets • Payments of accounts payable • Interest payments • Rent (and lease) payments

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• Cash dividend payments • Wages and salaries • Principal payments (loans)

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• Tax

• It is important to recognize that depreciation and other noncash charges are not included in the cash budget, because they merely represent a scheduled write-off of an earlier cash outflow. • Illustrative Example:

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Jungaya Industries has gathered the following data needed for the preparation of a cash disbursements schedule for October, November, and December.

- Purchases - The firm’s purchases represent 70% of sales. Of this amount, 10% is paid in cash, 70% is paid in the month immediately following the month of purchase, and the remaining 20% is paid 2 months following the month of purchase.

monthly sales.

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- Rent Payments - Rent of PHP5,000 will be paid each month. - Wages and Salaries - Fixed salary cost for the year is PHP96,000, or PHP8,000 per month. In addition, wages are estimated as 10% of - Tax Payments - Taxes of PHP25,000 must be paid in December. - Fixed Assets - New machinery costing PHP130,000 will be purchased and paid for in November. - Interest Payments - An interest payment of PHP10,000 is due in December. Answer Key:


70,000

Forecasted purchases (70%)

Cash Purchases (10%)

140,000

280,000

210,000

140,000

August

September

OCTOBER

NOVEMBER

DECEMBER

P7,000

P14,000

P28,000

P21,000

P14,000

Payment of AP 98,000

2nd month (20%) Total Cash Purchases

P7,000

196,000

147,000

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49,000

1st month (70%)

P63,000

28,000

56,000

140,000

245,000

217,000

5,000

5,000

5,000

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Rent

14,000

48,000

Wages and Salaries Tax Machinery purchase

38,000

28,000 25,000

130,000

TOTAL CASH DISBURSEMENTS

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Interest

193,000 P418,000

10,000 P285,000

4. Net Cash Flow, Ending Cash, Financing, and Excess Cash

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• The firm’s net cash flow is found by subtracting the cash disbursements from cash receipts in each period. Then we add beginning cash to the net cash flow to determine the ending cash for each period. Finally, we subtract the desired minimum cash balance from ending cash to find the required total financing or the excess cash balance. If the computed amount is negative, the company needs financing. Otherwise, the company has excess cash. • The cash budget is part of planning. It helps managers anticipate future funding requirements in order to obtain proper financing even before the need arises. This will help them avoid usurious rates. On the other hand, if the company has excess cash, managers are able identify the investment instruments that will maximize the returns on the excess cash.


• Illustrative Example: Given the two illustrative examples, generate a cash budget showing the net cash flow, ending cash flow, financing, and excess cash. At the end of September, Jungaya’s cash balance was PHP50,000,and its notes payable and marketable securities equaled PHP0. The company wishes to maintain as a reserve for unexpected needs, a minimum cash balance of PHP25,000.

B. BUGAY INDUSTRIES Cash Budget For the months of October, November, and December 2015

210,000 (193,000)

Cash Receipts Less: Cash Disbursements

17,000

Add: Beginning Cash Balance

50,000

Ending Cash Less: Minimum cash balance

DECEMBER

340,000 (285,000)

(98,000)

55,000

67,000

(31,000)

67,000

(31,000)

24,000

(25,000)

(25,000)

(25,000)

42,000

(56,000)

(1,000)

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Cumulative excess cash balance (Cumulative required financing)

320,000 (418,000)

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Net Cash Flows

NOVEMBER

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OCTOBER

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• Answer Key:

• Comprehensive Illustrative Example:

It was December 2014 and the president of DCD Corporation wants to find out if the company has enough cash to pay the principal balance of the company’s loan worth PHP3 million by the end of 2015. He asked the chief accountant to prepare the cash budget for 2015. The following assumptions which will be used for the preparation of the cash budget for 2015 are as follows:

- Projected quarterly sales for 2015 are as follows: First quarter - Php 5 million Second quarter - -Php 7.5 million 191 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Third quarter - Php 8.5 million Fourth quarter - Php 10 million Fourth quarter sales in 2014 was Php 8 million.

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Sales are collected 90% in the quarter the sales are made. The remaining 10% is collected the following quarter.

- The cost of sales is 75% of sales. Merchandise inventories are purchased in the quarter these are sold. All merchandise purchased in the quarter are paid in the same quarter.

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- Operating expenses for each quarter paid in cash are as follows: First quarter - PHP500,000 Second quarter - -PHP750,000 Third quarter - PHP850,000

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Fourth quarter - PHP1,000,000

On top of these cash operating expenses, depreciation expenses that should be charged to operations is PHP150,000 per quarter.

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- Interest expense paid every quarter is PHP75,000.

- Income tax rate is 30%. The income taxes to be paid every quarter will be as follows: First quarter - PHP157,500

Second quarter - - PHP270,000 Third quarter - PHP315,000

Fourth quarter - PHP382,500

- Expected cash balance at the end of 2014 is about PHP350,000. For 2015, target cash balance is raised to PHP500,000 because of expected increase in sales.


Given the above assumptions, a cash budget can now be prepared for 2015. DCD Corporation Cash Budget For the Year Ending December 31, 2015 2nd Qtr

3rd Qtr

4th Qtr

6,750,000

7,650,000

9,000,000

800,000

500,000

750,000

850,000

5,300,000

7,250,000

8,400,000

9,850,000

3,750,000

5,625,000

6,375,000

7,500,000

Cash operating expenses

500,000

750,000

850,000

1,000,000

Income taxes

225,000

Quarter of Sale A quarter after sale

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4,500,000

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Collections

Payments Purchases

Loan payment

270,000

315,000

3,000,000

Interest expense

75,000 4,550,000

75,000

75,000

75,000

6,607,500

7,570,000

11,890,000

830,000

(2,040,000)

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Total payments

157,500

Net cash flow for the period

750,000 642,5000

Cash balance, beginning

350,000

1,100,000

1,742,500

2,572,500

1,100,000

1,742,500

2,572,500

532,500

500,000

500,000

500,000

500,000

600,000

1,242,500

2,072,500

32,500

Cash balance without financing Target cash balance

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1st Qtr

Cumulative excess cash (funding requirements)


Teacher Tips The 5Cs of credit will also be discussed in Sources and Uses and long-term funds that will be discussed in the third quarter.

5. Accounts Receivable • Accounts receivables spring out of the need to sell merchandise. • An excellent business proposition is to generate sales without offering a credit facility to customers. However, this concept is theoretically sound, but not sustainable.

- Consider a real estate company which sells condominium units at PHP5 million per unit. How many units can the property developer sell if

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he sells the units only on cash basis? Do you think he can sell a lot? Probably not as many as compared to providing instalment payments.

• Credit management strategically defines the quality of account receivables collection.

Character –the willingness of the borrower to repay the loan Capacity – a customer’s ability to generate cash flows Collateral – security pledged for payment of the loan Capital – a customer’s financial resources

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-

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• The collectability of accounts receivables depends largely on the quality of customers. The quality of customers depends on the standards or credit policies set up and used by an organization. Credit policies are an integral part of the credit evaluation and there are 5C’s used in credit evaluation. These are:

Condition – current economic or business conditions

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• Proper management of accounts receivable entails having a good billing and collection system.

- A good system should lead to the sending of statements of account to customers on time. - Follow-ups through phone calls or any form of gentle reminders should be made if customers fail to pay on time. These follow-ups can also serve as the management’s way of validating if the contact details given by customers are still valid and if the customers still occupy the same office.

• Aging of receivables is also a control measure to determine the amount of receivables that are still outstanding and past due.


P 60 million

1 - 30 day past due

20 million

31 - 60 day past due

10 million

61 - 90 day past due

3 million

Over 90 days past due

7 million

Total

Php 100 million

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Current

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• Accounts which have been past due for more than 90 days have higher probability to default. The aging of receivables is useful in determining the allowance for doubtful accounts. 6. INVENTORY MANAGEMENT

• Inventory management involves the formulation and administration of plans and policies to efficiently and satisfactorily meet production and merchandising requirements and minimize costs relative to inventories.

- Effective inventory management becomes critical when the nature of the products are either perishable (e.g. fruits, vegetables), fragile

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(e.g. glasses), or toxic (e.g. bleaching agent).

• Proper inventory management involves the determination of reasonable levels of inventories considering the size and nature of business.

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- Maintaining too much inventories has costs such as carrying or holding costs, possible obsolescence or spoilage. - On the other hand, too low inventory can result to stockout, and eventually lost sales.

7. Inventory In A Manufacturing Company

• In a manufacturing company, there are three types of inventory:

- Raw materials – these are purchased materials not yet put into production. - Work in process – these are goods and labor put into production but not yet finished. - Finished goods – these are goods put into production and finished. These are ready to be sold.

8. The ABC Analysis 195 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

• One way to control inventory is to classify inventory into a classification system called ABC Analysis. • Inventories classified as “A” are high valued items which should be safeguarded the most. • B items, on the other hand, are average-cost items that should be safeguarded more than C items but not as much as A items. • While C items have low cost and is the least safeguarded.

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To summarize: INVENTORY CLASS B

C

Money value

High

Medium

Low

Quality of control

Very strict

Strict

Inventory movement (flows)

Slow

Relatively fast

Agamata, F. (2014). Management Services.

Not too Strict Fast

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Sources:

C O

A

Gitman, L. (1976). Principles of managerial finance. New York: Harper & Row. Gitman, L. & Joehnk, M. (1981). Fundamentals of investing. New York: Harper & Row.

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Horngren, C. (1972). Cost accounting; a managerial emphasis. Englewood Cliffs, N.J.: Prentice-Hall. Roque, R. (1990). Reviewer in Management Advisory Services. Roque Press, Inc.

ENRICHMENT (30 MINS) Group work:

What are the three ways for Maria to better manage her cash balance?


Maria Luna, a 25-year-old nurse, works at a hospital that pays her every 2 weeks by direct deposit into her checking account which pays no interest and has no minimum balance requirement. She takes home about PHP9,000 every 2 weeks or about PHP18,000 per month. She maintains a checking account in the bank that does not earn any interest income with a balance of around PHP7,500. Whenever it exceeds that amount she transfers the excess into her savings account, which currently pays 1.5% annual interest.

PY

She currently has a savings account balance of PHP85,000 and estimates that she transfers about PHP3,000 per month from her checking account into her savings account.

C O

Maria pays her bills immediately when she receives them. Her monthly bills average about PHP9,500, and her monthly cash outlays for food and transportation cost total about PHP4,500. An analysis of Maria’s bill payments indicates that on average she pays her bills 10 days early. Bank Time Deposit are currently yielding about 4.2% annual interest. Maria is interested in learning how she might better manage her cash balances. Answer Key:

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The three ways for Maria to better manage her cash balance:

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1. Invest current balances. Maria can transfer her current savings account balances into a Time Deposit, thereby increasing the rate of interest earned from 1.5% to about 4.2%. On her current P17,000 balance, she will immediately increase her annual interest earnings by about PHP2,295. (0.042 - 0.015) X P85,000 2. Invest monthly surpluses. Maria can transfer monthly the PHP3,000 from her checking account to the Time Deposit, thereby increasing the annual earnings on each monthly transfer by about PHP81(0.042 - 0.015) X PHP3,000 which, for the 12 transfers, would generate additional annual earnings of about PHP972 (12 months X PHP81). 3. Slow down payments. Rather than paying her bills immediately on receipt, Maria can pay her bills nearer their due date. By doing this she can gain 10 days of disbursement float each month, or 120 days per year (10 days per month over12 months), on an average of PHP9,500 of bills. Assuming she can earn 4.2% annual interest on the PHP9,500, slowing down her payments would save about P133 annually (120/360) X 0.042 X P9,500 . Based on these three recommendations, Maria would increase her annual earnings by a total of about PHP3,400 (PHP2,295 + PHP972 + PHP133) . Clearly, Maria can grow her earnings by better managing her cash balances.


EVALUATION (30 MINS) Teacher Tips

Multiple Choice 1. The _________ inventory consists of all items currently in the production process. (a) raw materials

PY

(b) work-in-process (c) finished goods

C O

(d) apital goods

2. The _________ inventory consists of items that have been produced but not yet sold. (a) raw materials (b) work-in-process (c) finished goods

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(d) capital goods

(b) work-in-process (c) finished goods (d) capital goods

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3. The three basic types of inventory are all of the following EXCEPT (a) raw materials

4. The _________ inventory contains the basic components of the production process. (a) raw materials (b) work-in-process

Answer Key 1. B 2. C 3. D 4. A 5. D

(c) finished goods (d) capital goods


5. The credit applicant’s _________ is the amount of assets the applicant has available for use in securing the credit. (a) character (b) capacity (c) capital (d) collateral

PY

Problem Solving:

Sales

Cash Disbursements

August

$400

$300

September

500

500

October

500

700

November

600

400

December

700

500

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Month

C O

Gerry Jacobs, a financial analyst for Best Valu Supermarkets, has prepared the following sales and cash disbursement estimates for the period of August through December of the current year.

90% of sales are for cash, the remaining 10% are collected one month later. All disbursements are on a cash basis. The firm wishes to maintain a minimum cash balance of $50. The beginning cash balance in September is $25. Prepare a cash budget for the months of October, November, and December, noting any needed financing or excess cash available.


Answer Key: A Cash Budget for Best Valu Supermarkets Sept

Oct

Nov

Dec

$ 450

$ 450

$ 450

$ 630

Sales (cash 90%) Sales Collected (1 mo. lag 10%) Total cash receipts

40 $ 490

50 $ 500

50 $ 590

60 $ 690

500

700

400

500

Net cash flow

(10)

(200)

190

190

Beg. cash balance

25

15

(185)

5

Ending cash balance

15

(185)

5

195

Minimum balance

50

50

50

50

Required financing

35

235

45

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45

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Excess Cash

C O

Total cash disbursements

PY

Cash receipts

Best Valu Supermarkets should arrange for a line of credit for at least $235 during the four-month period.


Business Finance

Sources and Uses of Short-Term and Long-Term Funds Pt. 1

160MINS

LESSON OUTLINE

Performance Standards The learners shall be able to:

•

Distinguish debt and equity financing as well as the risks associated with each source of financing. Identify the bank and non-bank institutions in the vicinity that are possible sources of funds.

• •

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Learning Competencies The learners will be able to:

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•

Cite bank and nonbank institutions in the locality that would serve as possible sources of funds for business operations. (ABM_BF12-IIIe-f-13) Identify uses of funds. (ABM_BF12-IIIe-f-17)

•

Motivation

35

PY

15

A. Share news articles that feature actual companies that avail of debt and equity financing. B. Discuss potential liquidity problems or higher default risk if company does not use appropriate source of financing.

Instruction/ Discussion proper Delivery

60

Practice

Seatwork on matching the company objectives with either short or long-term financing

20

Essay questions about the lesson.

30


• Projector, if available • Board and writing materials will suffice

Resources (1) Brealey, R. Myers, S., & Marcus, A. (2004). Fundamentals of corporate finance. Boston, Mass.: McGraw-Hill Irwin.

Specific Learning Outcomes At the end of the unit lesson, the learners will be able to: •

Introduction Communicate the learning objectives /Review

C O

Content Standards The learners demonstrate an understanding of the sources and uses of shortterm and long-term funds, and the requirements, procedures, obligation to creditor, and reportorial necessities.

(2) Cayanan, A. Manuscript. (3) Gitman, L. (2009) Principles of managerial finance. Boston: Pearson Prentice Hall.

Know the advantages and disadvantages of using debt and equity financing. Distinguish the different sources and uses of funds available in the Philippines and their applicability in different situations.

(4) Roque, R. (1990). Management Advisory Services. Malabon: Roque Press, Inc.


INTRODUCTION (15 MINS) Communicate learning objectives •

Define financing - It means to provide funding for a particular need.

•

Ask the students what they think the possible sources of funds for a small business are (i.e. small sari-sari store). Sample Responses: Equity Infusion from investors/business partners

•

Start-up capital from owner

•

Loan from a bank

•

Loan from other financial institutions, etc.

•

Loan from family members/friends, etc.

MOTIVATION/ENRICHMENT (20 MINS)

C O

•

PY

Definitions:

•

Possible articles: (see APPENDIX) • Filinvest Land raises P8 billion from debt sale. (2015). InterAksyon.com. Retrieved 5 April 2016, from http://www.interaksyon.com/business/116404/filinvest-land-raises-php8-b-frombond-issue-to-boost-recurring-business • Jonsson, A. (2013). JG Summit raises $200 million from placement. FinanceAsia. Retrieved 5 April 2016, from http://www.financeasia.com/News/365482,jg-summit-raises-200-millionfrom-placement.aspx Companies can choose between two sources of financing, either debt or equity.

D EP

•

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1. Ask the students to read news articles relating to financing used by companies.

2. Discuss the articles using the following guide questions (EASY TO AVERAGE): • • • •

What are the subject companies? What are their main activities? What do they need financing for? How much did they raise through financing? In what manner did they manage to raise funds? What are the companies’ plans after achieving their proposed funding? 202 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Settlement Risk – risk that the bank may not be able to give back their deposit. Philippine banks are normally insured by the Philippine Deposit Insurance Corporation (PDIC). Depositors may recover up to PHP500,000 per depositor from PDIC in case of bank default/bankruptcy.

Misconceptions: Emphasize to the students that it is a common misconception that all of these investments will earn for certain. Clarify that each investment type has inherent risks involved, which nevertheless can be mitigated.

INSTRUCTION (25 MINS) 1. Ask the learners which they think is more expensive, debt, or equity financing?

•

Learners will usually answer that equity financing is less expensive since equity uses their own funds and they do not pay interest. Discuss that equity financing also has costs that may be more expensive than the cost of debt. Why? Because there is no guaranty on the returns. Even if the cost of equity is more expensive, companies still utilize equity due to its benefits such as no maturity, and other advantages which will be further discussed.

PY

•

C O

2. Definitions

• Debt Financing - borrowing money from lenders and not giving up ownership. • Equity Financing - the method of raising capital by selling company stock to investors (stockholders) in exchange of ownership interests in the company. • Discuss the advantages and disadvantages of debt financing and equity financing.

Advantages It is limited to interest payments.

Control

Lender has no control over operations and investment decisions.

Maturity

Advantages

Disadvantages

It does not require a fixed dividend payment.

It has the highest cost (see discussion on risk).

It may limit cash dividend declaration by management. There is a specified maturity date or periodic amortization payments.

Risk

Tax

Disadvantages

D EP

Cost

EQUITY FINANCING

ED

DEBT FINANCING

There is no maturity date. It is perpetual.

There is a risk of not meeting the obligation (default risk) Interest expense is tax deductible (it can minimize tax expense).

Among the sources of financing, it is the riskiest. 203

Dividends are not tax deductible.


Teacher Tip: This is in the point of view of the Company. Note that if debt is cheaper, why doesn’t the company avail of 100% debt financing? Possible answer: No bank/creditor will provide 100% debt financing. Creditors evaluate the paying capacity of borrowers which means the amount of loans they will tend depends on the ability of the company to serve the debt. Normally, this is based on the projected cash flows of the borrower. Note that it is risky because: • Stockholders are not guaranteed of returns unlike creditors which have guaranteed interest and principal payment. • Under the corporation code, creditors have to be paid first in case of liquidation before anything is paid to the stockholders • If the company is losing, it’s the stockholders who bear the loss.

Table 1: Comparison of Advantages and Disadvantages of Debt Financing vs. Equity Financing

MOTIVATION (15 MINUTES) 1. Consider the following situations:

Ask the learners what they think would happen to the company.

PY

• Fabrics Inc. put up a clothing outlet worth PHP10 million and funded the entire amount using a one-year short-term loan. The company’s average annual operating cash flows for the last three years is PHP 1.5 million.

C O

Sample Response: • Given the average annual operating cash flows of the company of only PHP1.5 million, there is a very high probability that Fabrics Inc. will not be able to pay the loan within one year. • Given the amount of the loan in relation to operating cash flows, management may be become very stressed thinking about how to settle this loan. This will adversely affect the executive time they spend in managing the core business of the Company.

ED

• Dragon Inc. is in the business of fireworks production. Their peak season is usually during the holidays, especially during Christmas and New Year. The company needs additional PHP500,000 to finance their working capital needs during the holiday season.

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Ask the learners how this should be financed. Should it be financed using short-term loan, long-term loan, or through equity? Sample Response: • This should be financed by short-term loan. Long-term loan and equity financing are not recommended for this temporary financing requirement because of the following reasons: • The need for financing is limited to the holiday season. • Equity financing is the most expensive, as previously discussed, while interest rates on long-term debt is also generally higher as compared to interest rates on short-term debt. Also, if the funds are needed only for a limited period, there is no need for the company to secure a long-term source of funds. 2. Ask the students if they can think of other scenarios where a mismatch for financing could be a problem for a business.


Teacher Tip: If the learners are passive, cite a few more examples, such as a small lending company with collections that have mismatched when giving out loans, to give them more insights on the topic at hand.

PY

• Sample response: Financing a long-term investment through a short-term loan. Let us say you are a restaurant owner and you are planning to open another branch which will cost you PHP8 million. The returns on this investment will be realised over a number of years. Therefore, financing it through a short-term loan, say one year, will give you too much pressure to pay the loan because the new branch may not have generated enough cash flow within the year to cover the PHP8 million.

INSTRUCTION (35 MINUTES) 1. Differentiate long-term and short-term financing.

C O

Short term financing is debt scheduled to be paid within a year while long-term financing is debt to be paid in more than a year. 2. Recap on liquidity risks and liquidity ratios.

ED

Liquidity risk typically refers to the inability of an investor to buy or sell an asset to avoid financial loss. It can also refer to the inability to meet obligations since assets are tied up with investments or inventory.

D EP

Ratios such as the current ratio and quick ratio measure the institution’s liquidity. There should be a balance between liquid funds and investments. Too high liquidity ratios will have opportunity costs since these funds could have been invested to yield earnings. Too low liquidity ratios, however, may cause the institution to default on payments should emergency situations arise. Enough liquid assets should be available to meet short term obligations. 3. Enumerate and describe the sources and uses of short-term funds. Provide actual examples under each type of source, if applicable. •

Suppliers Credit – refers to the extension of payment due date by suppliers. • Discuss the effects of stretching payables and show the computation for interest effects of not taking discounts. • For example, the terms 2/10 (2% discount if paid within 10 days) with the due date of 60 days will result in annual interest of (2/98)*(360/50 days), or 14.69%. Therefore, by 205 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Teacher Tip: You may ask the learners to identify the sources of short-term and long-term funds in class or in groups. This activity may be performed before enumerating the sources on the teaching guide. The objective of this activity is to get the learners’ interest about the subject.

• •

4. Discuss the factors considered in selecting the source of short-term financing.

•

•

•

Cost (Interest) • Informal lending sources like 5/6 may be the most expensive. Availability of short-term funds • Informal lending sources like 5/6 is most available because there are no formal requirements to avail of the facility. Risk • Whatever the source of fund is, if the company defaults, the lenders may foreclose some of the company’s properties or even the entire business itself to settle the loan. Flexibility • This pertains to the ability of the company to access funds. • or example, a bank loan may be cheaper but the bank may reject the loan application of the borrower because he/she did not pass the credit evaluation process of the bank. • This financial flexibility can be influenced by: • Nature of the Company’s business

D EP

•

Teacher Tip: There are other sources of short-term funds. Single proprietors and rich members of family and friends can be taped. Tell the learners that should they decide to do this in the future, everything has to be documented to avoid a fall out or a family feud. The ones listed in this teaching guide are the most commonly used. Add personal experiences and ask the learners whether they have encountered or have utilized funds from these sources.

PY

• • •

C O

•

ED

•

not availing of the discount, the one who ordered the supplies from the supplier in effect borrowed at 14.69%. It may also be viewed as the opportunity cost forgone. Advances from stockholders or other owners – personal funds advanced by a stockholder to a company that usually requires interest. These usually require little to no interest on advances, especially if the owner is advancing funds to assist the company in sudden liquidity crisis. This source, however, is depended on the availability of funds of an individual. Credit cooperatives – provided lending services to its members. Members usually pay contributions to the cooperative. Banks – provides several loan products catering to different types of needs. Credit Cards – just take note of the high interest rates on this source of funds. Lending Companies – companies that are dedicated to lending. They usually charge higher interest than banks but their credit requirements are more lenient compared to banks. Pawnshops – provides funds in exchange for collateral, usually jewellery, or other items of value. Informal lending sources (5/6) • Describe the actual interest paid for this type of lending • Interest is usually paid per month, and monthly interest is (6-5)/5 or 20%. Annual interest is actually 20%*12 or 240%.


•

• Leverage ratio • Stability of operating cash flows Restrictions (Debt covenants) • Some lenders like banks may require a minimum deposit balance with their branch for as long as the loans remain outstanding. • The bank’s approval may also be secured before cash dividends can be declared.

• • •

C O

•

Equity investors – these are the individuals/corporations which are issued common stock. They share in the ownership of the company. There are also equity investors who do not have voting rights in the company but have a share in dividends, usually a fixed percentage. These investors are issued preferred stock. Holders of preferred shares are first to receive dividends than common stock holders. Internally generated funds – not all profits are distributed to stockholders. Most of the profits are re-invested and used by companies to finance their needs. Banks – they provide long-term loans, depending on the nature of the need. For example, a 5-year to 10-year loan may be granted if the purpose of the loan is construction of an office building. Bonds – these are debt investments where an investor loans money to an entity which borrows the funds. Lending companies – they can also provide long-term loans.

ED

•

PY

5. Enumerate and describe the sources and uses of long-term funds.

D EP

6. The company’s capital structure is a major consideration for deciding which long-term sources of funds to utilize. The target would be to balance debt and equity and come up with the minimum cost of capital.

PRACTICE (20 MINUTES) 1. Group the class into 4 teams

2. Have them identify whether the following are short-term or long-term sources of financing. (EASY)


Teacher Tip: In times of liquidation, this is the order of payment priority: • Creditors • Preferred stockholders • Common stockholders

3. Provide scenarios and let them decide whether long-term or short-term financing is needed. (AVERAGE TO DIFFICULT)

Long-term

Franchise of a fast-food outlet

Long-term

Purchase of inventory for a clothing shop

Short-term

Loan for agricultural needs (i.e. palay production, mango, etc.)

Short-term

Loan for purchase of a commercial space

Long-term

Development of a subdivision

Long-term

Auto-loan

Long-term

Loan for sari-sari store supplies

Short-term

Housing Loan

Long-term

Emergency loans (advances)

ED

Acquisition of equipment

PY

Answer Key

In addition, define the so-called revolving line of credit. It allows the borrowers to renew their loans with a certain limit whenever they need it.

C O

Need/Activity

Teacher Tip

Short-term

4. Provide a time limit for them to write their answers on a piece of paper. After the activity, ask the class ‘Why is it important to distinguish between long-term or short term financing?’

•

It is important so that the sources or funds are matched with the needs of the company/business. Matching of sources and uses of funds saves the business from encountering defaults on obligations and incurring losses, and at the same time, use the funds at hand to earn profits.

D EP

5.

Teacher Tip


SELF-TEST QUESTIONS (RECITATION – MEDIUM TO DIFFICULT) 1. What are the advantages and disadvantages of long term debt financing? Give at least 3. Explain. 208 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

This exercise is given to make sure the learners understand the lessons. Self-test questions may be discussed through class recitation or you may opt to give these questions as an essay quiz. Since time is limited, if you opt an essay quiz, choose at most 3 questions for them to answer. If given as a recitation, make sure that all notes are kept before proceeding.

2. What are the advantages and disadvantages of equity financing? Give at least 3. Explain. 3. Identify the different sources of short-term funds and long-term funds. Give at least 3 and define. 4. Discuss when to use short-term funds in business.

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ED

C O

PY

5. Discuss when to use long-term funds in business.


Appendix Filinvest Land raises P8 billion from debt sale By Philippines News Agency  August 21, 2015 11:15 PM

ED

C O

PY

MANILA - Property developer Filinvest Land, Inc. (FLI) has raised P8 billion from a bond issue to partially fund new projects that can triple its retail and office space portfolio in the next five years. FLI president Josephine Gotianun-Yap said the company had budgeted P24 billion in capital expenditures this year. FLI listed successfully its seven- and 10-year peso fixed-rate bonds in the Philippine Dealing and Exchange Corp. on Thursday. The bonds attained the highest PRS Aaa rating from the Philippine Rating Services Corp. (PhilRatings). The Gotianun-owned property arm's fixed-rate bonds due 2022 and 2025 had an oversubscription of almost thrice the base amount of P5 billion, enabling the company to exercise the P3 billion oversubscription option approved by the Securities and Exchange Commission. “With this bond issuance, FLI is now in full-gear for office and retail space expansion. We are tripling our office and retail rental portfolio to hit close to one million square meters of gross leasable area in the next five years. We tap the long-term bond market to match our funding sources with our project horizons,” said Gotianun-Yap. FLI launched P6 billion worth of projects in the first half of 2015 while it targets a total of P16 billion for the entire 2015. It has developed over 2,400 hectares of land and more than 600,000 square meters of prime office, residential and retail spaces. “With the country’s real estate sector experiencing a continued robust growth, in line with the Philippine economy, FLI is in the best position and time to address the needs of a flourishing economy,” Gotianun-Yap said.

By Anette Jönsson 26 November 2013

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JG Summit raises $200 million from placement

JG Summit, the Philippine conglomerate controlled by the Gokongwei family, has raised Ps8.8 billion ($200 million) from a share placement that it will use partly to fund its purchase of a stake in power producer Manila Electric Co (Meralco). The deal was completed after the market closed on Monday, ahead of JG Summit’s inclusion in the MSCI Philippines index from the close of trading on Tuesday. The entry into the index was announced on November 7 and, according to a source, is estimated to result in $60 million to $85 million of additional buying of the company’s shares by passive index funds.


JG Summit’s share price jumped 12.1% in the first three days after the MSCI announcement to match the record closing high of Ps49 that it hit in April this year. It has given up all those gains since then, however, as the Philippines have been dealing with the fall-out from Typhoon Haiyan, which is known to have killed at least 4,000 people.

PY

The share price fell 4.9% on Monday as there may have been some leaks in the market that a placement was coming. Sources said the bookrunners built a shadow order book in the run up to the transaction and the base deal was largely covered at launch. JG Summit offered 220 million shares, which accounted for 3.2% of the existing share capital and consisted of approximately 98.1 million treasury shares and 121.9 million common shares that were sold through a top-up placement.

C O

They were marketed at a price between Ps40 and Ps41 apiece, which translated into a discount of 1.7% to 4.1% versus Monday’s close of Ps41.70.

ED

According to a source, there was pretty good demand, with orders from more than 40 investors when the books closed after about three-and-ahalf hours, but the price was fixed at the bottom for the maximum 4.1% discount. Even in light of the drop earlier in the day that is still a fairly tight discount for the Philippines, though.

D EP

The bookrunners clearly felt that was the case as the term sheet listed the discount range versus Monday’s volume-weighted average price rather than versus the close. Since the VWAP, at Ps42.50, was higher than the closing price, the implied discount listed on the term sheet was 3.5% to 5.9%. Most investors are unlikely to have been fooled by that though and it was no real surprise that the price was fixed at the bottom of the range. After all, the deal accounted for more than 60 days of trading based on the average daily volume in the past three months, or 35 days based on the more active trading in the past month. By comparison, the most recent overnight placement of size in a Philippine-listed company in early October, which was actually a sell-down by JG Summit in its food and beverage subsidiary Universal Robina, raised $280 million and was priced at a 6.5% discount. A $173 million placement of treasury shares in Universal Robina in July came at a 4.8% discount.


JG Summit was also unable to exercise the upsize option of up to 110 million common shares, which could have increased the total deal size to as much as $300 million.

PY

The deal attracted a mix of long-only funds, passive index funds and hedge funds, the source said. The index funds will have to buy JG Summit before it goes into the MSCI index in order to keep their exposure intact. The MSCI announcement did not include any information about the weighting, but analysts estimate the conglomerate will account for between 5.5% and 6% of the index. JG Summit is the only stock to go into the MSCI Philippine index following the latest semi-annual index review. No stocks will be removed.

C O

The Philippine conglomerate said on October 1 that it has agreed to buy the San Miguel Group’s 27.1% stake in Meralco for approximately Ps72 billion ($1.6 billion). This is the Gokongwei family’s first move into the power sector and, while the deal has yet to be completed, it seems to have received the thumbs up from investors.

ED

Confirmation of the acquisition helped to propel JG Summit’s share price from a low of Ps35 in mid-September to the November 12 close at Ps49 – a gain of 40%. Aside from getting a sizeable stake in a high dividend-paying company that supplies electricity to a quarter of the Philippine population, the acquisition will give JG Summit a foothold in the country’s power industry, which is in the process of ramping up capacity to meet the needs of a strongly growing economy.

D EP

The deal will also cement the company’s relationship with First Pacific. The Hong Kong-listed investment company owns just under 50% of Meralco following a battle for control of the Philippine utility with the San Miguel group in 2009. After losing out to JG Summit, the San Miguel Group has been trying to get out of its holdings in Meralco and after the sale of this 27% stake, the group will own no more shares in the company. When announcing the deal, JG Summit said that it intends to fund the acquisition through a combination of debt and equity, and president Lance Gokongwei later told reporters in Manila that about two-thirds of the financing will come from debt. The company has already sold $280 million worth of shares in Universal Robina in early October and, together with the $200 million raised from this latest placement, it now has enough fresh cash to cover the equity portion. 212 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Aside from food and beverage, JG Summit is also involved in hotel and property development, airlines, telecommunications, banking and petrochemicals. In the first nine months this year, the company posted a 9.4% increase in revenues to Ps110.9 billion and a 17.4% improvement in Ebitda to Ps25.9 billion.

PY

According to local media reports, JG Summit and First Pacific’s Philippine infrastructure unit (Metro Pacific) plan to team up to bid for a $400 million airport project in Cebu province.

D EP

ED

C O

The placement was arranged by CLSA and UBS.


Business Finance

Sources and Uses of Short-Term and Long-Term Funds Pt. 2

90MINS

LESSON OUTLINE

PY

Introduction Communicate the learning objectives /Review Motivation

C O

Content Standards The learners demonstrate an understanding of the sources and uses of shortterm and long-term funds, and the requirements, procedures, obligation to creditor, and reportorial necessities.

A. Connect the lesson to real life situations. B. Share the importance of the banking industry.

5 15


30

Enrichment Discussion of the research homework.

30


Evaluation

10

•

finance. Boston, Mass.: McGraw-Hill Irwin.

(2) Cayanan, A. Manuscript.

Specific Learning Outcomes At the end of this lesson, the learners will be able to: • •

Self-test questions regarding the 5 Cs of Credit

Materials Show the steps in loan application (ABM_BF12-IIIe-f-15) • Projector, if available Compare and contrast the loan requirements of the different bank and non• Board and writing materials will suffice bank institutions (ABM_BF12-IIIe-f-14) Resources List down obligations of entrepreneurs to creditors (ABM_BF12-IIIe-f-16) (1) Brealey, R. Myers, S., & Marcus, A. (2004). Fundamentals of corporate

D EP

• •

ED

Performance Standards The learners shall be able to identify the bank and non-bank institutions in the vicinity that are possible sources of funds.

Know the basic requirements in loan application of different types of borrowers; and Define the 5C’s of credit and their applicability in loan approval.

(3) Gitman, L. (2009) Principles of managerial finance. Boston: Pearson Prentice Hall. (4) Roque, R. (1990). Management Advisory Services. Malabon: Roque Press, Inc.


INTRODUCTION (5 MINS) Communicate learning objectives.

PY

MOTIVATION (15 MINS) 1. Option A: Remind the learners of an example discussed previously regarding the restaurant expansion worth PHP8 million.

C O

• •

Financing a long-term investment through a short-term loan. Let us say you are a restaurant owner and you are planning to open another branch which will cost you PHP8 million. The returns on this investment will be realised over a number of years. Therefore, financing it through a short-term loan, say one year, will give you too much pressure to pay the loan because the new branch may not have generated enough cash flow within the year to cover the PHP8 million. Pose this question to the learners: How do you plan to finance the PHP 8 million? Answer Key: Since this is a long-term investment where the expected benefits are going to be realized over a couple of years, this investment should be financed by long-term sources. Assuming that both long-term debt and equities are accessible, part of the requirements must be financed by long-term debt. The question is how do you obtain long-term debt.

2. Option B: Connect to real-life situations.

•

Ask whether the learners have family businesses and whether they have witnessed the application for loans of their respective businesses/families from financial institutions. In addition, inquire whether they are aware of business partnerships. Their respective family businesses might have experiences of equity infusion from investors or business partners.

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•

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•


If the learners do not have any such firsthand experience in loan applications and business partnerships, share personal experiences or witnessed practices.

Teacher Tip:

1. Ask the students what the usual loan products from banks they encounter are. • Sample Responses • Auto-Loan

Teacher Tip:


If you have access to the internet, go to the website of some of our banks (eg. BDO, BPI, Metrobank) and look for their loan products. These loan products can be presented in class for the learners to appreciate.

• Housing Loan • Credit Card loan • Working Capital Loan, etc.

PY

2. Discuss the importance of Know-Your-Customer (KYC) initiatives. Banks are required to verify the identity of their customers to ensure that the funds will not be used for illegal activities such as, but not limited to, money laundering and terrorist financing.

• • • • •

Character –the willingness of the borrower to repay the loan Capacity – a customer’s ability to generate cash flows Collateral – security pledged for payment of the loan Capital – a customer’s financial resources Condition – current economic or business conditions

4. Discuss the following example/case:

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3. Explain the 5C’s of Credit - the institution’s primary consideration in approving loan applications.

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Mr. Joe Salazar applied for a PHP1.5 million loan in behalf of his business, “Joe’s Restaurant”, for additional capital in 2015. He is the Chairman of the Board of Joe’s Restaurant. In their meeting, the Board decided to open an additional branch for the restaurant. Joe’s Restaurant currently has 3 branches in Metro Manila and would like to open up a small branch in Quezon City. Joe’s Restaurant has been in the business for 12 fruitful years and has been a previous borrower of the bank. The company had previous late payments before but the reasons are usually justifiable, and the balance of the loan, along with any penalties, if any, is paid. The three branches earn a net income of PHP900,000/ year. The lot where the main restaurant is located is pledged as collateral to the bank. This property is valued at PHP2 million. Shown below is an excerpt from Joe’s Restaurant’s 2014 consolidated audited financial statements.


Teacher Tip: Ask the students to read the case out loud. Involve them in the analysis of the 5C’s of credit. Ask them what other considerations they could think of in analysing whether to grant the loan or not. Take note that the feasibility of the new project is yet to be established. Otherwise, the loan analysis is incomplete. Collateral in itself is not enough to ensure repayment. The loan should be long-term to accommodate the project as well as the company’s cash flow and profit.

As of 31 December 2014

As of 31 December 2013

1,200,000

900,000

Long-term Assets

4,400,000

4,200,000

Short-term Liability

500,000

460,000

Long-term Liability

2,300,000

3,500,000

Equity

2,800,000

1,140,000

Net Income

900,000

950,000

Cash Flow from Operations

500,000

450,000

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Current Assets

Table 1: Sample Consolidated Audited Financial Statements Ask the students to identify the information to be used in analysing the 5C’s of Credit. (AVERAGE TO DIFFICULT)

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• Character: Check Joe’s Restaurant’s payment history and experience in the business. The fruitfulness of the business proves Mr. Salazar and the BOD’s ability to manage the business well. • Capacity: The positive income from the business and positive cash flows from operations proves the borrower’s capacity. Current assets also show that the borrower has funds easily available for repayment if necessary. The term of the loan, should be adjusted to the cash flow of the borrower. • Collateral: The property pledged serves as collateral. Its value is usually greater than the loan to provide the bank security for sudden changes in value of the collateral, as well as to compensate the bank for the collateral’s illiquid nature. • Capital: The audit financial statements give a preview of the borrower’s resources. • Condition: The income statement shows that the business is earning and is even growing. The business has already grown to 3 branches. This shows a preview of the growth in the food industry. Learners may also research on other business growth trends to know about macroeconomic conditions. 5. Discuss the duties of the Borrower to Creditors.

• Pay the creditors based on the payment schedule agreed upon. If you cannot pay on time, notify the creditors ahead of time. But as much as possible, pay on time.


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• Provide the collaterals as agreed upon in the loan negotiation with proper documentation, if necessary and if applicable (e.g. annotation of the TCT or CCT). Ensure that these collaterals are in the physical condition perceived by the creditors in determining the loanable value of the loans. • Comply with the provisions of loan covenant such as maintaining certain liquidity and leverage ratios. These conditions are supposed to benefit the borrower so that his company will not be over-exposed to borrowing or he will monitor the liquidity position on a more regular basis. • Notify the creditor if the company is acquiring another company or the company is now the subject of acquisition. The interest of creditors may be jeopardized if new owners take over the company or if the company is going to acquire another company. • Do not default on the loans as much as possible. Aside from the creditors, there may be other parties such as the guarantors of the loan who will be put at a disadvantage if the borrower defaults.

MOTIVATION (10 MINUTES) Share the importance of the banking industry.

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}

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• Provision of Credit and Liquidity – Banks provide credit facilities to borrowers which allow them to address their liquidity concerns. advisory service on asset-liability management and can • Risk Management Services – Banks provideBanks provide a mechanism for people to save which in also provide recommendations regarding the appropriate financing schemes for a company’s funding requirement.and corporations. This turn is used by entrepreneurs or intermediaries for money remittances. • Money Remittance – Banks can act as conduits function of the bank enhances economic activity. Economic Development • • Channel for Saving and Investment • Promotion of Entrepreneurship


A. Ask the students to visit a bank before the class. Have them inquire on the different loan requirements and steps in loan application, and compare the different rates for the different loan products. Give them ample time to prepare for a report on what they have researched. Divide the class into groups and assign each a topic to report on. • Different Loan requirements for small business loan, loans to corporation, personal consumption loans, and other desired loan products. • Steps in Loan Application for secured and unsecured loans. 218 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Teacher Tip B. Assign two groups to report on the requirements of the following institutions:

Evaluate the reports based on content, especially on the interview part. Have the other non-reporting groups turn-in a written report.

PY

• Pawnshop • Lending company C. Ask the learners to discuss the general steps on Loan Application. Make them prepare a flowchart. (AVERAGE TO DIFFICULT)

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ED

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Sample responses of the learners research on the general steps are as follows: • Loan applicant inquires with the loan officer to apply for a loan. • The loan officer provides the loan applicant a loan application form and interviews the client. • The loan officer then decides what type of loan product the borrower qualifies in, and then provides them a list of requirements. • The applicant then submits the requirements along with the loan application form. • If collateral is required, the corresponding mortgage documents are made ready. • The loan officer then forwards the documents to the credit evaluation department. • The credit evaluation department checks whether the applicant provided the complete documents. • Credit investigation is done, and the credit worthiness of the loan applicant is evaluated. • The credit analyst prepares a recommendation and will present the recommendation before a loan committee who approves the loan application. The loan committee is generally composed of top executives from the bank. • If the loan is approved, then the post-approval requirements will be sent to the loan applicant for compliance.

D. Let the learners enumerate the different requirements for a sole proprietorship, consumption loans, and loans to corporations, as well as the requirements for non-bank financial institutions. (AVERAGE TO DIFFICULT) Here is a sample of bank requirements for your reference:


Teacher Tip References to this material are actual requirements from different institutions

List of Bank Requirements for Loan Application for a Corporation (Arthur S. Cayanan)

This may be given as recitation and questions may be asked per group or individually.

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ED

C O

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Pre-approval Requirements: • Duly accomplished application form • Securities and Exchange Commission (SEC) registration • Articles of incorporation and by-laws • List of elected officers • Board resolution or corporate secretary’s certificate regarding loan application • Company profile or business background • List of major suppliers and customers with contact information • Audited financial statements (2 to 5 years depending on the bank) • Bank statements (most banks require bank statements for the past 6 months) • Collateral documents such as the following: • Copy of transfer certificate of title (TCT) or condominium certificate of title (CCT) • Copy of tax declaration • Appraisal Fee with official receipt • For construction loan • Building plan or floor plan • Bill of materials and labor cost • Building specifications certified by architect/civil engineer • Development permit Copy of lease contracts (if applicable) •

Teacher Tip

Post-approval Requirements: • Original owner’s duplicate copy of TCT/CCT • Original certified true copy of latest tax declaration on land and improvement • Master deed of declaration (for condominium) • Electronic-certified true copy of TCT/CCT with original official receipt • Original certified true copy of tax clearance • Original real estate tax receipts • Mortgage redemption insurance • Fire insurance 220



Teacher Tip This may be given as recitation and questions may be asked to a group or an individual.

Self-Test Questions: 1. Enumerate the 5C’s of credit (EASY)

PY

2. What do you think is the most important consideration of banks in approving a loan? (AVERAGE TO DIFFICULT)

C O

‘Character and Capacity are the most important factors a bank considers in approving a loan. They go hand-in-hand because without willingness to repay, the available funds to pay the loan will not in itself guarantee payment.’

3. Why is it important for banks to collect all the loan requirements? Which requirements are meant to be used to evaluate each of the 5C’s of credit? (AVERAGE TO DIFFICULT) Sample Responses:

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• Documents are required to provide support on the analysis of the borrower’s existence and creditworthiness. • Character – Interview, Fully filled out loan application form, NBI clearance, Police Clearance, etc. • Capacity – Income documents (Certificate of employment, Audited financial statements, Income tax return, etc.) • Collateral – Copy of TCT, Tax declaration, Building plan, etc. • Capital – Statement of Assets and Liabilities, Audited financial statements, etc. • Condition – Latest news articles relating to the company (if listed), Trends in the financial statements, Business Background/Company Profile, etc.


Business'Finance

180 MINS

Basic Long-Term Financial Concepts


LESSON OUTLINE Introduction Communicate learning objectives

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Content Standards The learners demonstrate an understanding of the basic concepts of risk and return, and the time value of money.

Motivation

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• Distinguish simple and compound interest.

• Solve exercises and problems in computing for the time value of money with the aid of present and future value tables.

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Learning Competencies The learners will be able to: • Calculate future value and present value of money. (ABM_BF12-IIIg-h-18) • Compute for the effective annual rate. (ABM_BF12-IIIg-h-19)

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95

Practice

25

Exercises regarding solving for the present value

Enrichment Short case regarding which payment methods to choose in order to optimize receipts using concepts learned in present value and future value

• Compute the present value and future values with the aid of formulas and tables. • Apply the concepts in real life scenarios.

• Projector, if available. Board and writing materials will suffice. • Scientific calculator • PV and FV tables

Resources

222

35

Instruction/ Discussion Proper Delivery

Materials

• Define the concepts regarding the time value of money.

a. Connect to real life situations b. Present a short scenario relating the importance of interest and compounding c. Present a scenario showing the use of future value and present value

5

(1) Brealey, R., Myers, S., & Marcus, A. (2004). Fundamentals of corporate finance. Boston, Mass.: McGraw-Hill Irwin. (2) Gitman, L. (2009). Principles of managerial finance. Boston: Pearson Prentice Hall. (3) Roque, R. (1990). Management Advisory Services. Malabon: Roque Press, Inc.


20

INTRODUCTION (5 MINS) Communicate learning objectives • Ask the learners to define ‘interest’.

PY

• Interest - the cost of holding money. It is the amount charged by the lenders to the borrowers/ users of money, and is usually paid at regular intervals.


2. Have the learners read the story below: (Appendix A)

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1. Ask the learners one or two of their experiences in investing their money. Let them share their experiences.

If the learners are passive, be able to share personal experiences in investing money. Time deposits and bank savings can also be a type of investment although it only has a small yield. The objective is to show the concept of interest in real-life scenarios

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One day, the Master was going on a trip and decided to entrust his wealth to three of his most trusted servants. The wealth shall be given to each servant based on the Master’s assessment of their talents. To his first servant, he entrusted PHP500,000. To his second servant, believing that he can make wise choices as well, he also gave an amount of PHP500,000. Finally, he called on his third servant and gave him PHP500,000. The Master then went on his journey and told the servants he will not be back for a long time. Since the first servant was a very smart person, he decided to invest the PHP500,000 given to him. He was very pleased that he was quoted a long-term investment for 5 years at 8% per annum compounded annually, and decided to invest the money in that institution. The second servant saw what the first servant did and also decided to invest the money. However, when given the choice by the investment firm, he did not understand simple and compound interest. In the end, he accepted the quote at 8% per annum simple interest. The third servant saw them and thought that they were being too much of a risk-taker and decided just to keep the money locked in a vault in his home.

Teacher Tips

The Master returned after 5 years. He then called on the servants and asked them what has become of the wealth he had entrusted them. The first servant presented his PHP500,000 plus the interest he earned worth PHP500,000 x (1.08)5 – 500,000 = 234,664.04 . The second servant 223 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Teacher Tips This story is based on the Parable of talents from the Bible. It has been modified for the purpose of discussion. In this story, the risk of losing money due to the failure of a financial institution is not taken into consideration. Give the learners a copy of the material which is included in the appendix of this teaching guide for their reference.

presented his PHP500,000 along with the interest earned at 500,000 x .08 x 5 = 200,000 Lastly the third servant returned his PHP500,000. SERVANT 1 SERVANT 2 SERVANT 3 500,000.00

500,000.00

500,000.00

Interest

234,664.04

200,000.00

0.00

Total Returned

734,664.04

700,000.00

500,000.00

INSTRUCTION (35 MINS) 1. Differentiate simple and compounded interest.

C O

3. Ask the learners ‘Which servant will make the Master most pleased?’

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Principal

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• Simple Interest – the charging interest rate r based on a principal P over T number of years.

Teacher Tips Learners have the option to use calculators or the present value and future value tables provided at the end of this module .

Interest = P x r x T In the story above, Rate = 8%

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Principal = PHP500,000 Time = 5 years Thus,

Interest = 500,000 x .08 x 5 = PHP200,000

• Compound Interest - the interest in the first compounding period is added on the principal, which will then be the basis for the interest to be computed for the next period. So in our earlier example, the interest to be earned on the first year is equal to 500,000 x .08 = 40,000. The 40,000 interest will be added to the 500,000 principal which will then be the basis for interest computation for the 224 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Teacher Tips Usual compounding will make use of annual compounding. This simplifies the formula to: Interest = P x (1+r)T – P

second year; 540,000 x .08 = 43,200, and so on. The formula below shows the summary of the effects of adding on the interest, where m is the compounding frequency. Interest = ( P x (1 +

r m

) (T x m) ) - P

In the story above,

PY

Principal = PHP500,000 Rate = 8% Time = 5 years Compounding frequency = annually

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Thus,

Interest = 500,000 x (1 + (0.08/1))(5x1) – 500,000 = PHP234,664.04 2. Discuss the use of compounding frequency and provide illustrations.

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• Compounding Frequency - the number of times interest is computed on a certain principal in one year. • If the investment pays annually, the interest is the same as computed above since m=1. • If the investment pays semi-annually, the total interest will be equal to:

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Interest = 500,000 x (1+(0.08/2))(5x2) – 500,000 = PHP240,122.14 3. Ask the learners to compute the interest earned over the 5 year term with PHP500,000 as principal using the following compounding periods. (EASY) • Quarterly: PHP242,973.70 • Monthly: PHP244,922.85

• Semi-monthly: PHP245,416.34

• Daily (365 days): PHP245,879.66


Teacher Tips Interest rates when quoted without any qualification is assumed to be an annual rate. Note that with more compounding, interest income can be higher as shown in the illustrative example. Banks offer time deposit products with different types of compounding, thus affecting the interest to be earned.

4. Introduce the Effective Annual Rate (EAR).

PY

So far, we have discussed about interest earned on investments. It is also important to look at interest rates from the point of view of borrowers. Both businesses and investors need to make an objective comparison of loan costs or investment returns over different compounding periods. The effective annual rate allows this comparison because it is the actual interest actually paid or earned. It should be distinguished from the nominal rate, or the stated contractual rate which is the interest charged by a lender or promised by a borrower. It does not reflect the effect of compounding frequency.

EAR = ( 1 +

r m

) m) - 1

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The formula for computing the EAR is as follows:

5. Discuss the following illustrative example:

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This is very similar to the formula for computing for interest earned using compounded interest. The only difference is that EAR only takes into consideration the actual interest for one year.

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Mr. Lopez wishes to find the effective annual rate for his loan in BOD bank with a 5% nominal annual rate when interest is compounded (1) annually, (2) semi-annually, and (3) quarterly. • For annual compounding: 5%

• For semiannual compounding: 5.06% • For quarterly compounding: 5.09%

Teacher Tips Walkthrough the process of getting each EAR using the formula provided.

Ask the learners to compute for the EAR for the following: (AVERAGE) • For monthly compounding: 5.12% • For daily compounding: 5.13% The effective annual rate increases with increasing compounding frequency, up to a limit that occurs 226 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

with continuous compounding, which is almost equivalent to daily compounding.

PY

The Truth-in-Lending act for Banks and other financial institutions requires that they disclose the effective interest rates for loan products to borrowers. The effective rates should reflect the service charges and other deductions from the loan proceeds.


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1. Ask the learners which is more valuable to them, to receive PHP1,000 today or receive PHP1,000 five months from now.

• Sample Response: PHP1,000 today, because there is uncertainty with regard to the receipt of the PHP1000 five months from now. The student can be indifferent if he will be compensated by receiving more 5 months from now, which is in the form of interest income.

2. Read the following story in class.

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• Recall the following saying: ‘A bird in the hand is worth two in the bush’ – Miguel de Cervantes

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Consider the case of Lola Clara. When she was 24 years old, her Papa gave her PHP50,000. She was very happy and was immediately planning on spending the money. However, before she could spend the money, her Mama taught her the importance of saving. Not wanting to disappoint her Mama, she invested her money in a bank time deposit with an interest rate of 5% at that time. Lola Clara became a very successful career woman but she somehow forgot that she placed PHP50,000 in the bank. She suddenly remembered and was shocked at what had happened to her money after 50 years. It is now valued at 50,000 x (1.05)50 = 573,369.99.

This example is something of an exaggeration, of course. Nevertheless, it is important to note that money grows through time. 227 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Teacher Tips This story shows how money grows over time. Its worth in the future is dependent on the amount invested today, which would be a prelude to our discussion in future and present value.

INSTRUCTION (60 MINS) A. Differentiate future value and present value.

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• Future Value - the amount to which an investment will grow after earning interest. In our previous examples, it is the principal plus total interest earned over a stated period. So the future value of an investment of PHP500,000.00 yielding an interest of 8% for a 5-year period compounded annually is PHP734,664.04. • Present Value - the amount you have to invest today if you want to have a certain amount of cash flow in the future. • These definitions can better be illustrated in a timeline. 1

2

3

Initial Investment T-0 (PV): Php 500,000

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0

Teacher Tips

4

5

Value of investment at T-5 (FV): Php 734,664.04

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Figure 1: Growth of Value over 5-year period

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• The time value of money analysis helps managers and investors compare cash flows today versus cash flow in the future. It answers questions such as what amount in the future is equal to PHP500,000.00 today or what amount today is equivalent to PHP734,664.04 in the future. The future value is computed using compounding while the present value is computed using discounting. In practice, when making investment decisions, investors usually adopt the present value approach. B. Differentiate the basic patterns of cash flow.

• Single Amount (Lump Sum) - a single cash outflow is made and the total receipts will be at a single future date. • Annuity - periodic stream of equal cash flow at equal time intervals (annually, monthly, etc.). For example, payment for a certain item shall be for 12 equal monthly instalments of PHP1,000. • Mixed Stream - unequal periodic cash flows that reflect no particular pattern. For example, 228 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Show the timeline to better explain the concept. Write the equations on the board and solve the problems.

payments made by a customer are in 3 unequal instalments. TIME

AMOUNT 1,500

Year 2

3,000

Year 3

2,500

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Year 1

Table 1: Sample of Mixed Stream

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C. Ask the learners to compute for what amount they will receive (what is the future value) if PHP150,000 is invested at 6% per annum compounded semi-annually for 3 years. 0.06 (3x2) Answer: 150,000 x (1+ ) = PHP179,107.8 2 Reminder: Future value is simply the principal multiplied by the FV factor.

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D. Discuss the present value of a single amount.

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• Present Value - answers the question: How much must be invested today to produce a certain amount in the future. Since future value is calculated by multiplying the present investment by 1 + interest rate compounded by the number of periods, we shall just reverse the process. This method is called discounting FV = PV x (1 + r)T PV =

FV (1 + r)T

• Illustration: You need P25,000.00 to buy a laptop when you enter into college 2 years from now. How much must you invest now if the interest rate is at 6% per annum? PV = 25,000/(1.062) = PHP22,249.91

You need to invest PHP22,249.91 to have PHP25,000.00 by the end of 2 years.


E. Illustrate how to calculate future value and present value of mixed streams of cash flows. • Future Value: Suppose that you choose to put your savings annually in MRI bank at 8% per annum. For today, you put PHP1,200, on the second year PHP1,400, and PHP1,000 for the third year. How much will you have available at the end of three years? Future Value

PHP1,200

1,511.65

(1.08)2 = 1.1664

PHP1,400

1,632.96

(1.08)1 = 1.08

PHP1,000

1,080.00

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(1.08)3 = 1.2597

Total FV

P4,224.61

Table 2: Sample Computation to Identify Future Value

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• The FV factor can either be computed or looked up in the FV table. • This timeline illustrates the timing of cash flows: 1

2

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0

-1,200

-1,400

Distinguish when the amounts are paid. If payments are made on the last day or maturity date, the amount is already the future value.

PY

Factor multiplied by the Amount Deposited

Teacher Tips

-1,100

3

4,224.61

Figure 2: Timing of Cash Flows

• (Present Value) Suppose that you can buy a phone for PHP8,000 down payment with 4,000 for each of the next two years or pay PHP15,500 cash today. Given an interest rate of 8%, which is a cheaper alternative?


Teacher Tips

Present Value 8,000.00

PHP4,000/(1.081)

3,703.70

PHP4,000/(1.082)

3,429.36

Total PV

PHP15,133.06

Table 3: Sample Computation for Present Value 1

-8,000

-4,000

-4,000

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PV = 15,133.06

2

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0

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Distinguish when the amounts are paid. If payments are made on day 1, the amount no longer needs to be discounted, and is already the present value.

PHP8,000

Figure 3: Sample Timeline for Computation of Present Value

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It shows that the installment plan is cheaper. The present value of a stream of future cash flows is the amount you have to invest today to generate the stream. F. Discuss how to compute for present value and future value of annuity payments. Illustrate how the present and future values are used. • An annuity is a stream of equal periodic cash flows over a specified period. First, you have to distinguish between ordinary annuity and annuity due. Ordinary annuity payments are made at the end of each period (usually annually), while for annuity due, the cash flow occurs at the beginning of each period. We shall first illustrate ordinary annuities. • (Future Value of an Ordinary Annuity) The formula for computing the future value of an ordinary annuity is as follows: 231 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Cash flow x {[(1+r)t - 1)]/r} Cash flow x or

[(1+r)t - 1] r

Cash flow multiplied by the FV factor seen on the table.

PY

To use the table provided, look for the rate of interest at the uppermost row and the number of periods on the left most column. The intersection will be the factor to be multiplied to the cash flow. Illustration: Mr. Mendoza wishes to determine how much the value of his savings in 5 years will be if he will put PHP1,000 per year in a bank which provides 7% interest per annum.

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FV = 1,000 x (FVA factor: 5.7507 period=5, rate=7%) = PHP5,750.70

• (Present of an Ordinary Annuity) The formula for computing the present value of an ordinary annuity is as follows: Cash flow x

ED

or

1-

1

(1+r)t

r

Cash flow multiplied by the PV factor seen on the table

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Illustration: Mr. Yusoph wants to buy a pair of shoes worth PHP10,500. He has the option of paying it today for PHP10,500 or buying them in instalment where he has to pay a down payment of PHP4,000 today, and the balance will be paid in two equal payments of PHP4,000 each for the next two years. Given an interest rate of 10%, which is the better option? PV = 4,000 + 4000 x (PVA factor: 1.7355 period=2, rate=10%) = PHP10,932.00 for buying on instalment vs. PV PHP10,500 for buying today. The 4,000 down payment is not multiplied by the annuity factor because it is paid today. Since buying on instalment would be more expensive, Mr. Yusoph should buy the pair of shoes today.


PRACTICE (25 MINS) Give these questions to the learners in the form of a graded quiz/exercise. (EASY)

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1. You deposited PHP1,500 in a bank with an interest rate of 5% for 1 year. What is the future value of your deposit? Answer Key

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FV = 1,500 x (1+0.05) = 1,575

2. You need to save up for P1,500 in 1 year. How much should you save now if the bank offers a rate of 5%? (Find the present value) Answer Key

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PV = 1,500/(1+0.05) = 1,428.57 (AVERAGE TO DIFFICULT)

Answer Key

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1. FNB pays 6% interest compounded semi-annually. SNB pays 6% compounded monthly. Which bank offers the higher effective annual rate?

FNB = (1+(0.06/2))2 - 1 = 6.090% SNB = (1+(0.06/12))12 = 6.168%

Therefore, SNB offers the higher effective annual rate. For equal rates, the more compounding the better. 2. Compute the present value and future value of PHP100 cash flow for the following combination of discount rates and times: a. r = 8%, t = 5 years 233 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

b. r = 8%, t = 10years c. r = 5%, t = 5years d. r = 5%, t = 10 years Answer Key t

PV

FV

0.08

5

68.05832

146.9328

0.08

10

46.31935

215.8925

0.05

5

78.35262

127.6282

0.05

10

61.39133

162.8895

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PY

r

Answer Key Simple Interest = 1000 x .04 x 10 = 400

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3. You deposit PHP1,000 in your bank account. If the bank pays 4% simple interest, how much interest will you accumulate in your account after 10 years? What if the bank pays compound interest?

D EP

Compound Interest = 1000 x (1.0410) – 1000 = 480.24

4. Mario will be making a lump sum payment of PHP1.6 million on the condominium he is buying two years from now. If he wants to set aside funds from now and invest it that will earn interest of 3%, net of taxes every year and this amount is compounded annually, how much does he need to invest today? What if the interest is compounded semi-annually, how much does he need to invest today? Answer Key

• PHP1,600,000/(1.03)2 = 1,508,153.45

• PHP1,600,000/(1.015)4 = 1,507,494.77


Year

Cash Flow

1

300

2

400

3

500

PY

5. What is the present value of the following cash flow stream if the interest is 6%?

Answer Key

C O

PV = 300/1.06 + 400/(1.062) + 500/(1.063) = 1,059.827

6. What is the present value of a 3-year annuity of PHP100 if the discount rate is 6%? Answer Key

ED

PVA = 100 x PVA factor(2.673) = 267.3

7. What is the present value of a 5-year annuity payment of PHP1,000 with a discount rate of 5% if the first payment will be made today? Answer Key

D EP

PVA = (1000 x PVA factor(4.329))/1.05 = 4,122.87


Teacher Tips

Discuss the following scenario:

Mr. Sotto won PHP10 million in the lottery. He was very excited to collect his winnings and had several plans for his PHP10 million. He would buy his dream house, car, and a lot more. However, he was very disappointed when the officers from PCSO said that he will not get his PHP10 million pesos upfront. 235 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Give this exercise if the time permits. This medium length problem shows the importance of compounding and future value. Have the learners answer in groups on their best option. This will allow them to discuss among themselves and develop their understanding on time value.

He, however, has the following options: • Get 8.1 million upfront • Receive 1 million every year for 10 years • Receive 1.8 million every year for 5 years

PY

The current government bonds have a yield of 5% per annum. Which is the best option? Answer Key Option 1 = PV is 8.1 million

C O

Option 2 = PV = 1 million x PV factor (7.721) = 7.721 million Option 3 = PV = 1.8 million x PV factor (4.329) = 7.792 million

D EP

ED

Option 1 is the best option.


D EP

ED

C O

PY

Appendix

Table 4: Present Value of Ordinary Annuity

AccountingExplanation.com,. Present Value of Ordinary Annuity. Retrieved from http://www.accountingexplanation.com/present_value_ordinary_annuity_table.PNG 237 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

PY C O ED D EP Table 5: Future Value of Ordinary Annuity

PrinciplesofAccounting.com,. Future Value of Ordinary Annuity. Retrieved from http://www.principlesofaccounting.com/ART/fv.pv.tables/futurevalueofordinaryannuity.PNG 238 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Appendix A

C O

PY

One day, the Master was going on a trip and decided to entrust his wealth to three of his most trusted servants. The wealth shall be given to each servant based on the Master’s assessment of their talents. To his first servant, he entrusted PHP500,000. To his second servant, believing that he can make wise choices as well, he also gave an amount of PHP500,000. Finally, he called on his third servant and gave him PHP500,000. The Master then went on his journey and told the servants he will not be back for a long time. Since the first servant was a very smart person, he decided to invest the PHP500,000 given to him. He was very pleased that he was quoted a long-term investment for 5 years at 8% per annum compounded annually, and decided to invest the money in that institution. The second servant saw what the first servant did and also decided to invest the money. However, when given the choice by the investment firm, he did not understand simple and compound interest. In the end, he accepted the quote at 8% per annum simple interest. The third servant saw them and thought that they were being too much of a risk-taker and decided just to keep the money locked in a vault in his home.

D EP

ED

The Master returned after 5 years. He then called on the servants and asked them what has become of the wealth he had entrusted them. The first servant presented his PHP500,000 plus the interest he earned worth PHP500,000 x (1.08)5 – 500,000 = 234,664.04 . The second servant presented his PHP500,000 along with the interest earned at 500,000 x .08 x 5 = 200,000 Lastly the third servant returned his PHP500,000.


Business Finance

70 MINS

Basic Long-term Financial Concepts Pt. 2 LESSON OUTLINE Content Standards

PY

Motivation

Basic concepts of risk and return, and the time value of money. Performance Standards • •

Distinguish simple and compound interest Solve exercises and problems in computing for time value of money with the aid of present and future value tables

ED

Learning Competencies The learners:

Calculate future value and present value of money (ABM_BF12-IIIg-h-18) Compute for the effective annual rate (ABM_BF12-IIIg-h-19)

Materials

projector, of available; if projector not available, board and markers will suffice; scientific calculators; PV Tables

Resources (1) Fundamentals of Corporate Finance by Brealey, Marcus and Myers, Management Advisory Services by Rodelio S. Roque, Principles of Managerial Finance by Lawrence J. Gitman (2) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex Bookstore.

D EP

• •


C O

The learners shall be able:

Connect to real-life situations; short scenario relating the importance of interest and compounding; scenario showing the use of future value and present value

Specific Learning Outcomes

At the end of the unit lesson, the learners shall be able to: • • •

Define the concepts regarding the time value of money; Compute the present value and future values with the aid of formulas and tables; and Apply the concepts in real life scenarios.


20

50

MOTIVATION (20 MINS) Ask the learners which is more valuable to them, to receive P1,000 today, or receive P1,000 five months from now.

•

Possible answer: P1,000 today, because there is uncertainty with regard to the receipt of the P1000 five months from now. The student can be indifferent if he will be compensated by receiving more 5 months from now, which is in the form of interest income. Recall the following saying:

PY

•

C O

A bird in the hand is worth two in the bush–Miguel de Cervantes Read the following story in class.

ED

Consider the case of Lola Clara. When she was 24 years old, her Papa gave her PHP50,000. She was very happy and was immediately planning on spending the money. However, before she could spend the money, her Mama taught her the importance of saving. Not wanting to disappoint her Mama, she invested her money in a bank time deposit with an interest rate of 5% at that time.

D EP

Lola Clara became very successful career woman but she somehow forgot that she placed PHP50,000 in the bank. She suddenly remembered and was shocked at what had happened to her money after 50 years. It is now valued at 50,000 x (1.05)50 = 573,369.99.

This example is something of an exaggeration, of course. Nevertheless, it is important to note that money grows through time.


Teacher Tip If the learners are passive, be able to share personal experiences in investing money. Time deposits and bank savings can also be a type of investment although it only has a small yield. The objective is to show the concept of interest in real-life scenarios

Teacher Tip This story is based on the Parable of talents from the Bible. It has been modified for the purpose of discussion. In this story, the risk of losing money due to the failure of a financial institution is not taken into consideration. Give the learners a copy of the material which is included in the appendix of this teaching guide for their reference.

INSTRUCTION (50 MINS) Differentiate future value and present value Future value is the amount to which an investment will grow after earning interest. In our previous examples, it is the principal plus total interest earned over a stated period. So the future value of an investment of PHP500,000 yielding an interest of 8% for a 5-year period compounded annually is PHP734,664.04.

•

In contrast, the present value is the amount you have to invest today if you want to have a certain amount of cash flow in the future.

•

These definitions can better be illustrated in a timeline.

  1

2

4

Teacher tip: Learners have the option to use calculators or the present value and future value tables provided at the end of this module

5

Value of investment at T=5 (FV): PHP734,664.04

D EP

Ini$al'Investment'T=0' (PV):'PHP500,000'

•

3

ED

0

C O

 

PY

•

The time value of money analysis helps managers and investors compare cash flows today versus cash flow in the future. It answers questions such as what amount in the future is equal to PHP500,000 today or what amount today is equivalent to PHP734,664.04 in the future.   The future value is computed using compounding while the present value is computed using discounting. In practice, when making investment decisions, investors usually adopt the present value approach.

Differentiate the basic patterns of cash flow


Teacher tip: ¬ Usual compounding will make use of annual compounding. This simplifies the formula to: Interest = P x (1+r) T – P

Single amount (Lump sum): a single cash outflow is made and the total receipts will be at a single future date.

•

Annuity: periodic stream of equal cash flow at equal time intervals (annually, monthly, etc.). For example, payment for a certain item shall be for 12 equal monthly instalments of PHP1,000.

•

Mixed stream: Unequal periodic cash flows that reflect no particular pattern. For example, payments made by a customer are in 3 unequal instalments.

Amount

Year 1

1,500

Year 2

3,000

Year 3

2,500

C O

Time

PY

•

ED

Ask the learners to compute for the amount they will receive (what is the future value?) if PHP150,000 is invested at 6% per annum compounded semi-annually for 3 years.

D EP

Answer:

Reminder: Future value is simply the principal multiplied by the FV factor. Discuss the present value of a single amount.

•

Present value answers the question how much must be invested today to produce a certain amount in the future. Since future value is calculated by multiplying the present investment by 1 + interest rate compounded by the number of periods, we shall just reverse the process. This method is called discounting 243 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Teacher tip: Interest rates when quoted without any qualification is assumed to be an annual rate. Note that with more compounding, interest income can be higher as shown in the illustrative example. Banks offer time deposit products with different types of compounding, thus affecting the interest to be earned.

Illustration: You need PHP25,000 to buy a laptop when you enter college 2 years from now. How much must you invest now if the interest rate is at 6% per annum

PY

•

PV = 25,000/(1.062) = PHP22,249.91

•

C O

You need to invest PHP22,249.91 to have PHP25,000 by the end of 2 years.

Illustrate how to calculate future value and present value of mixed streams of cash flows.

ED

(Future Value) Suppose that you choose to put your savings annually in MRI bank at 8% per annum. For the today, you put PHP1,200; second year PHP1,400, and PHP1,000 for the third year. How much will you have available at the end of three years? Factor multiplied by the Amount Deposited

Future Value

PHP1,200

1,511.65

Teacher tip:

(1.08)2 = 1.1664

PHP1,400

1,632.96

PHP1,000

1,080.00

Interest rates when quoted without any qualification is assumed to be an annual rate.

(1.08)1 = 1.08 Total FV

D EP

(1.08)3 = 1.2597

P4,224.61

•

The FV factor can either be computed or looked up in the FV table.

•

This timeline illustrates the timing of cash flows:


Note that with more compounding, interest income can be higher as shown in the illustrative example. Banks offer time deposit products with different types of compounding, thus affecting the interest to be earned.

1

-1,200

-1,400

2

3

-1,000

4,224.61

PY

•

0

(Present Value) Suppose that you can buy a phone for PHP8,000 down payment with 4,000 for each of the next two years or pay PHP15,500 cash today. Given an interest rate of 8%, which is a cheaper alternative?

8,000.00

PHP4,000/(1.081)

3,703.70

PHP4,000/(1.082)

3,429.36

Total PV

PHP15,133.06

D EP

ED

PHP8,000

-8,000

PV = 15, 133.06

C O

Present Value

-4,000

-4000 Teacher Tip Walkthrough the process of getting each EAR using the formula provided.

It shows that the installment plan is cheaper. The present value of a stream of future cash flows is the amount you have to invest today to generate the stream. 245 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Discuss how to compute for present value and future value of annuity payments. Illustrate how the present and future values are used.

PY

An annuity is a stream of equal periodic cash flows over a specified period. First, you have to distinguish between ordinary annuity and annuity due. Ordinary annuity payments are made at the end of each period (usually annually), while for annuity due, the cash flow occurs at the beginning of each period. We shall first illustrate ordinary annuities.

Cash flow x {[(1+r)t - 1)]/r} or

C O

(Future Value of an Ordinary Annuity) The formula for computing the future value of an ordinary annuity is as follows:

Cash flow multiplied by the FV factor seen on the table

D EP

Illustration:

ED

To use the table provided, look for the rate of interest at the uppermost row and the number of periods on the on the first column (leftmost). The intersection will be the factor to be multiplied to the cash flow.

Mr. Mendoza wishes to determine how much will be the value of his savings in 5 years if he will put PHP1,000 per year in a bank which provides 7% interest per annum. FV = 1,000 x (FVA factor: 5.7507 period=5, rate=7%) = PHP5,750.70

Teacher Tip Walkthrough the process of getting each EAR using the formula provided.

(Present Value of an Ordinary Annuity). The formula for computing the present value of an ordinary annuity is as follows: '''''''''''''''''''''''''''''''''''Cash'ﬂow'mul$plied'by'the'PV'factor'seen'on'the'table'


Illustration:

PY

Mr. Yusoph wants to buy a pair of shoes worth P10,500. He has the option of paying it today for PHP10,500 or buying in instalment where he has to pay a down payment of PHP4,000 today, and the balance will be paid in two equal payments of PHP4,000 each for the next two years. Given an interest rate of 10%, which is the better option? PV = 4,000 + 4000 x (PVA factor: 1.7355 period=2, rate=10%) = PHP10,932.00 for buying on installment vs. PV PHP10,500 for buying today.

C O

The 4,000 down payment is not multiplied by the annuity factor because it is paid today.

D EP

ED

Since buying on instalment would be more expensive, Mr. Yusoph should buy the pair of shoes today.

Teacher Tip Walkthrough the process of getting each EAR using the formula provided.


Business Finance

50 MINS

Basic Long-term Financial Concepts Pt. 3 LESSON OUTLINE Content Standards

PY

Practice

Basic concepts of risk and return, and the time value of money.

Enrichment Short case regarding which payment

Performance Standards

The learners:

ED

Distinguish simple and compound interest Solve exercises and problems in computing for time value of money with the aid of present and future value tables

Learning Competencies • •

C O

The learners shall be able: • •

Exercises regarding solving for the present value.

Calculate future value and present value of money (ABM_BF12-IIIg-h-18) Compute for the effective annual rate (ABM_BF12-IIIg-h-19)

D EP


Materials

methods to choose in optimizing receipts using concepts learned in present value and future value

projector, of available; if projector not available, board and markers will suffice; scientific calculators; PV Tables

Resources (1) Fundamentals of Corporate Finance by Brealey, Marcus and Myers, Management Advisory Services by Rodelio S. Roque, Principles of Managerial Finance by Lawrence J. Gitman (2) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex Bookstore.

At the end of the unit lesson, the learners shall be able to: • • •

Define the concepts regarding the time value of money; Compute the present value and future values with the aid of formulas and tables; and Apply the concepts in real life scenarios.


25 25

PRACTICE (25 MINS) Give these questions to students in a form of a graded quiz/exercise. (EASY) You deposited PHP1,500 in a bank with an interest rate of 5% for 1 year. What is the future value of your deposit?

PY

•

•

C O

Answer: FV = 1,500 x (1+0.05) = 1,575

You need to save up for P1,500 in 1 year. How much should you save now if the bank offers a rate of 5%? (Find the present value)

(AVERAGE TO DIFFICULT)

FNB pays 6% interest compounded semi-annually. SNB pays 6% compounded monthly. Which bank offers the higher effective annual rate?

D EP

•

ED

Answer: PV = 1,500/(1+0.05) = 1,428.57

Answer: FNB = (1+(0.06/2))2 - 1 = 6.090%

SNB = (1+(0.06/12))12 = 6.168% (Therefore, SNB offers the higher effective annual rate. For equal rates, the more compounding the better) •

Compute the present value and future value of P100 cash flow for the following combination of discount rates and times:


A. r = 8%, t = 5 years B. r = 8%, t = 10years C. r = 5%, t = 5years D. r = 5%, t = 10 years

PV

FV

0.08

5

68.05832

146.9328

0.08

10

46.31935

215.8925

0.05

5

78.35262

127.6282

0.05

10

61.39133

162.8895

C O

t

You deposit PHP1,000 in your bank account. If the bank pays 4% simple interest, how much interest will you accumulate in your account after 10 years? What if the bank pays compound interest?

ED

•

r

PY

Answer:

Answer:

•

D EP

Simple Interest = 1000 x .04 x 10 = 400 Compound Interest = 1000 x (1.0410) – 1000 = 480.24

Mario will be making a lump sum payment of PHP1.6 million on the condominium he is buying two years from now. If he wants to set aside funds from now and invest it that will earn interest of 3%, net of taxes every year and this amount is compounded annually, how much does he need to invest today? What if the interest is compounded semi-annually, how much does he need to invest today?

Answer: i. PHP1,600,000/(1.03)2 = 1,508,153.45 ii. PHP1,600,000/(1.015)4 = 1,507,494.77 250 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Time

Amount

Year 1

300

Year 2

400

Year 3

500

Answer: PV = 300/1.06 + 400/(1.062) + 500/(1.063) = 1,059.827

What is the present value of a 3 year annuity of P100 if the discount rate is 6 percent?

Answer: PVA = 100 x PVA factor(2.673) = 267.3

What is the present value of a 5 year annuity payment of P1000 with a discount rate of 5% if the first payment will be made today?

Answer:

D EP

•

ED

•

PY

What is the present value of the following cash flow stream if the interest is 6%?

C O

•

PVA = (1000 x PVA factor(4.329))/1.05 = 4122.87


ENRICHMENT (25 MINS) (DIFFICULT)

Teacher tip:

Discuss the following scenario:

Get 8.1 million upfront

•

Receive 1 million every year for 10 years

•

Receive 1.8 million every year for 5 years

C O

•

PY

Mr. Sotto won PHP10 million in the lottery. He was very excited to collect his winnings and had several plans for his PHP10 million. He would buy his dream house, car, and a lot more. However, he was very disappointed when the officers from PCSO said that he will not get his PHP10 million pesos upfront. He, however, has the following options:

The current government bonds have a yield of 5% per annum. Which is the best option?

Option 1 = PV is 8.1 million

ED

Answer: Option 2 = PV = 1 million x PV factor (7.721) = 7.721 million

Option 3 = PV = 1.8 million x PV factor (4.329) = 7.792 million

D EP

Option 1 is the best option.


Give this exercise if the time permits. This medium length problem shows the importance of compounding and future value. Have the learners answer in groups on their best option. This will allow them to discuss among them and develop their understanding on time value.

PY C O ED D EP http://www.accountingexplanation.com/present_value_ordinary_annuity_table.PNG 253 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

PY C O ED D EP http://www.principlesofaccounting.com/ART/fv.pv.tables/futurevalueofordinaryannuity.PNG 254 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Business Finance

120 MINS

Basic Long-term Financial Concepts Pt. 4

Introduction Communicate the learning objectives. Motivation Sharing of an article regarding bond

PY

Content Standard The learners demonstrate an understanding of the basic concepts of risk and return, and the time value of money.

issuance; connecting to real-life situations


C O

Performance Standard The learners shall be able to prepare loan/bond amortization tables

Practice

ED

Learning Competency The learners compute loan amortization using mathematical concepts and the present value tables (ABM_BF12-IIIg-h-20) Specific Learning Outcomes At the end of the unit lesson, the learners shall be able to:

•

Define the relationship of present value and future value in loan/bond pricing; and, Prepare amortization schedules.

Research/Interview homework

Enrichment Quiz on preparation of amortization Materials

schedules

10 10 50 30 20

projector, if available; if projector not available, board and markers will suffice; calculators; PV Tables

Resources (1) Accounting Principles by Jerry J. Weygandt, Paul D. Kimmel, & Donald E. Kieso; Financial Accounting Vol. 2 by Conrado T. Valix, Peralta, Valix

D EP

•

LESSON OUTLINE


Teacher Tip

INTRODUCTION (10 MINS) Recall the definition of present value, future value, and the importance of the time value of money from the previous lesson. Have the learners define the terms mentioned.

Give the learners a copy of the article.


Ask the learners read the following article: (APPENDIX A)

C O

http://www.abs-cbnnews.com/business/08/19/15/ictsi-raise-450-m-bonds

PY

Communicate the learning objectives.

These terms will be relevant in loan/bond pricing so it is best to recall the definitions and formulas of present and future value.

ICTSI to raise $450-M via bonds Reuters Posted at 08/19/2015 10:05 AM

ED

MANILA - Philippines port operator International Container Terminal Services Inc. (ICTSI) said on Wednesday it is raising $450 million through a bond issue. In a disclosure to the local stock exchange, ICTSI said its board of directors approved on Tuesday night the offering of new senior perpetual capital securities through subsidiary Royal Capital BV.

D EP

The corporate bonds would yield 5.5 percent per annum and would be guaranteed by ICTSI. Citigroup Global Markets Ltd, Credit Suisse Securities (Europe) Ltd and Standard Chartered Bank were the joint lead managers and bookrunners. ICTSI, owned by the Philippines' third richest man, Enrique Razon, is into 30 terminal concessions and port development projects in 20 countries. Define what a bond/loan is.

A loan is money lent at an interest rate for a certain period of time. Loans are normally secured from different financial institutions, the most common of which, are banks.. A bond is also a form of loan, but can be traded through Philippine Dealing and Exchange (PDEX) System. 256 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Ask the learners whether they have experienced applying for loan from a bank, or have witnessed someone from their family apply for one. Inquire whether they have seen an amortization schedule and are familiar with the features of the loan (interest rates, term of payment, etc.)

PY


Teacher tip Refer back to lessons on loan discussed under Sources and Uses of Cash

Show the class a sample loan amortization (provided at the end of this teaching guide) Enumerate the contents of a loan agreement: Amount of principal

•

Maturity date and provision for repayment

•

Term of the loan (lump sum, monthly, etc.)

•

Grace period, if applicable

•

Interest rates

•

Loan/bond covenants (i.e. required ratios to be maintained)

•

Penalties for default

•

Collateral documents, if applicable

C O

•

ED

•

•

Present Value •

D EP

Discuss the relationship of time value of money in loan/bond pricing.

To get the present value of a bond maturing a year from now, let us illustrate what we have learned in the previous module regarding present value. The discussion follows the viewpoint of the lender. Pricing for the loan/bond, will, nevertheless, be the same. Let’s say that you are willing to invest a sum of money that will yield PHP100,000 at the end of year 1, what amount should you invest today? If the investment earns 10%, then the amount to be invested or the present value should be equal to PHP100,000 x (1/(1.101)) = PHP90,909.09


Teacher tip Grace period is a provision in most loan and insurance contracts which allows payment to be received for a certain period of time after the actual due date. During this period no late fees will be charged, and the late payment will not result in default or cancellation of the loan. (http://www.investopedia.com/terms/g/ grace_period.asp#ixzz408xF58xx) It is best to draw diagrams to demonstrate the importance of present value in loan/ bond pricing.

•

If this amount will be received in 2 years, then the present value is equal to P100,000 x (1/(1.10)2) = P82,644.63. We may also use the present value table.

PY

•

Present Value of interest payments (annuities)

In addition to receiving the face value at maturity, the investor/lender also receives periodic interest payments over the life of the bond. These periodic payments, as mentioned in the previous module, are called annuities. To illustrate, assume that you will receive P10,000 annually for 3 years and the interest rate is 10%.

•

From the table (or by using the formula provided in the earlier module), we get that the present value of annuity factor for 3 periods using 10% interest is 2.4869. Multiplying this factor by PHP10,000 provides a present value of interest payments of PHP24,868.6.

D EP

•

ED

C O

•

Present Value of a bond •

To calculate the present value or the price of a bond, we need to combine both the present values of the face value and the annuity payments. In our previous example, suppose that a bond with face value of PHP100,000 pays interest of 10% annually and matures in 3 years. What is the price of the bond?

•

First, we find the present value of the face value of the bond. That is equal to PHP100,000 x (1/(1.10)3) = PHP75,131.40.

•

Next we compute for the present value of annuity payments of P10,000 annual interest (100,000 x .1). This was computed earlier in our example, PHP24,868.6. 258 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Teacher tip Take note of the frequency of compounding. It matters for both the interest payments and face value discounting.

•

Therefore, the price of the bond is: PHP100,000 Face Value at 10% for 3 years

75,131.40

PHP10,000 interest for 3 years

24,868.60 100,000.00

Take note that interest payments may be made semi-annually, or even monthly. In this case, we need to adjust the interest rates and time periods accordingly.

Differentiate discount from premium bond pricing.

•

Bonds issued at a discount

When bonds are issued below the face or par value, they are said to be issued at a discount. A discount occurs when the required rate of return is greater than the nominal rate of return. For example, let’s say we have a PHP100,000 bond with a stated rate of 10% and effective rate (required rate of return) of 12%, that pays interest semi-annually and has a maturity of 3 years. At what price should the bond be issued?

•

First, we need to compute for the amount of interest payment per semi-annual period which is equal to 100,000 x 10% x 6/12 = 5,000. The total period is 6 (3 years x 2) and the discount rate to be used is 6% (12%/2).

•

The price of the bond is as follows:

ED

•

D EP

•

C O

•

PY

Price of the Bond

P100,000 Face Value at 6% for 6 periods

70,496.05

P5,000 interest for 6 periods

24,568.62

Price of the Bond

95,082.67

Bonds issued at a premium 259 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

When bonds are issued above par, they are said to be issued at a premium. It occurs when the required rate (effective rate) is below the stated or nominal rate. Let us recall our previous example but use 8% effective rate instead of 12%. It will result in the following bond price: PHP100,000 Face Value at 4% for 6 periods

79,031.45

PHP5,000 interest for 6 periods

26,210.68

PY

•

105,242.13

Price of the Bond

Illustrate and define effective interest amortization.

The effective interest method distinguishes two types of interest rate, the nominal rate or the stated rate and effective rate or the market rate. When the bond is sold at a discount, the effective rate is higher than the nominal rate. On the other hand, when the bond is sold at a premium, the effective rate is lower than the nominal rate. Using this method, the amortization of bond discount or premium results in periodic interest expense equal to a constant percentage of the carrying amount of the bonds.

•

The following steps are required under the effective interest method.

C O

•

ED

•

D EP

1. Calculate the bond interest expense by multiplying the carrying amount of the bonds at the beginning of the interest period by the effective interest rate. 2. Calculate the bond interest paid (or accrued) by multiplying the face value of the bonds by the contractual interest rate. 3. Calculate the amortization amount by determining the difference of (1) and (2). •

Amortization of bonds issued at a discount •

Let us use the previous example of a bond issued at a discount.


Teacher Tip: Best to discuss by showing the amortization table and how it is computed line by line as stated in the tip below.

Period: 6 semi-annual periods (3 years) Effective interest: 12% Stated rate: 10% Face Value: 100,000

Interest to be paid  =100,000 x 5%

Interest Expense   =carrying amount x 6%

5,000.00

5,704.96

2

5,000.00

5,747.26

3

5,000.00

5,792.09

4

5,000.00

5,839.62

5

5,000.00

6

5,000.00

Carrying Balance

Teacher Tip:

95,082.68

704.96

95,787.64

747.26

96,534.90

792.09

97,326.99

839.62

98,166.61

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1

5,890.00

890.00

99,056.61

5,943.40

943.40

100,000.00

Amortization of bonds issued at a discount •

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•

Amortization of Discount  =Int exp. - Int paid

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Period

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Issue Price: 95,082.68

Let us use the previous example of a bond issued at a premium.

Period: 6 semi-annual periods (3 years) Effective interest: 8% Stated rate: 10% Face Value: 100,000 Issue Price: 105,242.14


Show the preparation of the amortization schedules step by step, beginning with taking note of the given data. Ensure that the frequency of compounding is reflected in both effective and nominal rates.

Period

Interest to be paid  =100,000 x 5%


Amortization of Premium  =Int exp. - Int paid

Carrying Balance

105,242.14

5,000.00

4,209.69

(790.31)

104,451.83

2

5,000.00

4,178.07

(821.93)

103,629.90

3

5,000.00

4,145.20

(854.80)

4

5,000.00

4,111.00

(889.00)

5

5,000.00

4,075.44

(924.56)

6

5,000.00

4,038.46

PY

1

102,775.09 101,886.10

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100,961.54

(961.54)

100,000.00

Amortization of the discount or premium brings the carrying value/balance to equal the face value of the bond upon maturity.

•

Bond issue costs (direct loan expenses) are either added to the carrying value of the bond/ loan in case of a premium or subtracted from the carrying value of the bond/loan in case of a discount.

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Briefly discuss straight line amortization

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•

This method is not allowed in our country’s accounting standards but is allowed in other countries. The straight line method provides for an equal amortization of bond premium of discount. The procedure is simply to divide the amount of the bond premium of bond discount by the life of the bonds to arrive at the periodic amortization.


Teacher Tip: Emphasize that the amortization of the discount or premium brings the carrying value/balance to equal the face value of the bond upon maturity. It can be a way for the learners to check if what they are doing is correct.

PRACTICE (30 MINS) Ask the learners answer the following as exercises/quiz. (EASY)

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1. Ms. Rodriguez invested in a PHP2,000 bond with a coupon rate and effective rate of 5%. How much is the issue price? 2. You have a one year PHP1,000 bond with a coupon rate of 5% and was offered at an effective rate of 6%. How much is the issue price?

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3. Mr. Garcia invested in a P1,000 bond for one year with a coupon rate of 7% and was offered at an effective rate of 5%. How much should he pay upfront? (Issue price) (DIFFICULT)

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4. On January 1, 2015, Mac Inc. issued 3,000,000 bonds with a coupon rate of 8% maturing in 4 years. The interest is paid annually, and the market interest rate at the date of issue was 11%. What is the issue price of the bond? Prepare the 4 year amortization schedule for the bond.

Answer Key:

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5. On January 1, 2014, Sonic Co. issued 4,000,000 12% bonds maturing in 5 years. The bonds pay interest semi-annually. The market rate of interest as of the date of issuance is 10%. What is the issue price of the bond? Prepare the 5 year amortization schedule for the bond.

1. Since the coupon and effective rate are the same, the issue price stays at PHP2,000. 2. Issue price = (1,000 + 50 coupon)/1.06 = 990.56

3. Issue price = (1000 + 70 coupon)/1.05 = 1,019.05 4. Issue price: PHP2,720,779.89 Principal Interest

1,976,192.92

744,586.97 2,720,779.89


Period

Interest to be paid  =3M x 8%



Carrying Balance

2,720,779.89

240,000.00

299,285.79

59,285.79

2,780,065.68

2

240,000.00

305,807.22

65,807.22

2,845,872.90

3

240,000.00

313,046.02

73,046.02

2,918,918.92

4

240,000.00

321,081.08

81,081.08

3,000,000.00



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1

Principal

2,455,653.01

Interest

1,853,216.39

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5. Issue price: PHP4,308,869.40

4,308,869.40 Interest to be paid  =4M x 6%

Carrying Balance

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Period

215,443.47

(24,556.53)

4,284,312.87

214,215.64

(25,784.36)

4,258,528.51

212,926.43

(27,073.57)

4,231,454.94

240,000.00

211,572.75

(28,427.25)

4,203,027.68

5

240,000.00

210,151.38

(29,848.62)

4,173,179.07

6

240,000.00

208,658.95

(31,341.05)

4,141,838.02

7

240,000.00

207,091.90

(32,908.10)

4,108,929.92

8

240,000.00

205,446.50

(34,553.50)

4,074,376.42

9

240,000.00

203,718.82

(36,281.18)

4,038,095.24

10

240,000.00

201,904.76

(38,095.24)

4,000,000.00

240,000.00

2

240,000.00

3

240,000.00

4

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1

4,308,869.40


Teacher tip


Give the learners ample time beforehand to be able to collect the necessary information. The purpose of this activity is to show the learners of the actual use of amortization schedules.

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Have the learners visit a bank or any other financial institution and get a sample quotation for a certain type of loans (Auto-loan, Housing Loan, Working Capital Loan, etc.) to be assigned to a group. It is best to divide the class in groups of 5 members. Learners may also utilize amortization schedules of those who are in the business of selling apartments/condominiums. Have them discuss the specifics of the loan in class, and have them validate the accuracy of the amortization schedules provided to them by showing their own solutions.

This is an optional activity, but can be a very useful tool for the learners’ appreciation of the learning competency. Should time not permit it, increase the time allotted for the practice exercises.


APPENDIX A ICTSI to raise $450-M via bonds Reuters Posted at 08/19/2015 10:05 AM

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MANILA - Philippines port operator International Container Terminal Services Inc. (ICTSI) said on Wednesday it is raising $450 million through a bond issue. In a disclosure to the local stock exchange, ICTSI said its board of directors approved on Tuesday night the offering of new senior perpetual capital securities through subsidiary Royal Capital BV.

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The corporate bonds would yield 5.5 percent per annum and would be guaranteed by ICTSI.

Citigroup Global Markets Ltd, Credit Suisse Securities (Europe) Ltd and Standard Chartered Bank were the joint lead managers and bookrunners.

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ICTSI, owned by the Philippines' third richest man, Enrique Razon, is into 30 terminal concessions and port development projects in 20 countries.


APPENDIX B

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Sample Loan Amortization Schedule


Business Finance

180 MINS

Basic Long-term Financial Concepts Pt. 5

LESSON OUTLINE

Performance Standards The learners shall be able:

•

Compute for the net present value of a project with a conventional cashflow pattern. Describe the risk-return trade-off.

ED

•

Learning Competencies The learners:

•

Apply mathematical concepts and tools in computing for finance and investment problems. (ABM_BF12-IIIg-h-21) Explain the risk-return trade-off. (ABM_BF12-IIIg-h-22)

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•


• •

Motivation

Share an article related to capital expenditure or business expansion; ask the learners of possible means to evaluate the viability of projects.

15

Instruction/ Delivery

Discussion proper

75

Practice

Exercise on investment problems.

30

Enrichment

Short case on making investment decisions

45

Materials

projector, of available; if projector not available, board and markers will suffice; calculators; PV Tables

Resources (1) Brealey, R., Myers, S., & Marcus, A. (2004). Fundamentals of corporate finance. Boston, Mass.: McGraw-Hill Irwin. (2) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex Bookstore.

At the end of the unit lesson, the learners shall be able to: •

15

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The learners demonstrate an understanding of the basic concepts of risk and return, and the time value of money.

Communicate the learning objectives.

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Content Standards

Introduction

Compute payback period, net present value, and define internal rate of return. Apply payback period and net present value in making investment decisions. Analyse the risks and returns of long-term investments.

(3) Gitman, L. (2009). Principles of managerial finance. Boston: Pearson Prentice Hall.


INTRODUCTION (15 MINS) Communicate the learning objectives. Ask the learners of the importance of interest and the time value of money.

•

Introduce the concept of risk. Ask the learners to identify the considerations taken and the risks involved in venturing into a new business (e.g. restaurant business).

PY

•

Teacher Tip

What are the considerations in entering a new business? • Is there a market for the product/services you want to offer? • Are the products/services you plan to offer basic necessities or not? • Can you identify the players in the industry? • What are the salient features/competitive edge of the product/services your plan to offer? • Do you have the managerial competence and technical expertise to run the business? • Do you have distribution channels by which you can sell you products/services? • Do you have the financial resources to start and operate the business?

•

In entering a business or making expansion decisions, the question that stands to be answered shall be, “Will the profits earned from the business for a given amount of time be enough to cover or even be greater than the amount of capital invested?” The main objective is, of course, to maximize shareholder’s wealth. This also applies to questions regarding business expansion.

•

Ask the learners to read the following scenario to further introduce the topic.

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•


If the product/service is a basic necessity demand will inelastic which means that whatever the economic conditions will be, there will be a minimum demand for the product/service.

Teacher Tip

Eli Lilly and Company

The main takeaway from this short story is payoff. Provide the class a copy of the story.

Riding the Pipeline by Lawrence J. Gitman

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Companies spend money on new investments if they believe that those investments will later generate enough cash flow to justify the up-front cost. For pharmaceutical companies like Eli Lilly, the average length of time from the discovery of a new drug until delivery to a patient is 10 to 15 years. After R&D produces a promising lead, a drug is still a long way from being ready for human testing. Researchers must probe further to determine what dosage will be required and at what level it might be toxic to the patient. They also must explore practical issues such as whether Lilly will be able to manufacture the compound on a large scale. The clinical trials themselves can take years. To help recoup its investment, a drug manufacturer can get a 20-year patent that grants the company exclusive rights to the new drug. However, with the lengthy research and approval process, companies may have fewer than 10 years to sell the drug while the patent is in force. Once patent protection expires, generic drug manufacturers enter the market with low-priced alternatives to the name-brand drug.

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For Eli Lilly, the cost of bringing a new drug to market runs from $800 million to $1.2 billion. To keep its drug pipeline full, Eli Lilly plows some 20 percent of sales back into the R&D programs on which its future depends. With large cash expenditures occurring years before any cash return, the time value of money is an important factor in calculating the economic viability of a new drug.

Teacher Tip You may opt to use a different article as long as it shows expansion or capital expenditure. The reading can be shared in advance and be given as homework.


1. Share an article related to capital expenditure or business expansion. (APPENDIX B) •

•

Agcaoili, L. (2015). Cebu Pacific buying 16 ATR planes for $673 M. philstar.com. Retrieved 11 April 2016, from http://www.philstar.com:8080/business/2015/06/17/1466623/cebupacific-buying-16-atr-planes-673-m Use the following guide questions: (AVERAGE)

Teacher Tip The term “capital investment” and “longterm investment” have the same meaning.

•

What was the company’s expansion plan?

•

How much was the cost of the long-term investment?

•

What were their expected returns on this expansion plan? 270 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

2. Ask the learners what the company stands to gain in their expansion decision. •

Sample Answer: Gain in market share, increase in profits, and increase in shareholder value.

3. Ask the learners of possible means to evaluate the viability of the expansion plan. Sample Answer: Market research and feasibility study (on whether the expected capital outlay can be outweighed by the expected profits from the additional demand the company can cover, and whether a demand exists).

Gains are expected to be realized if the expansion proves successful. But if the expansion fails, the company can suffer. There are occasions when even a big company shuts down its entire operations because of a failed expansion.

PY

•

Teacher tip

INSTRUCTION/PRACTICE (75 MINS)

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Long-term investments need significant capital outlay thus careful analysis should be done. A company needs tools that can be used in evaluating which investments to take, and which to forego. This introduces us to our topic on Capital Budgeting.

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Define Capital Budgeting • It is the process of evaluating and selecting long-term investments that are consistent with the firm’s goal of maximizing owners’ wealth. Differentiate long-term investment from operating expenses.

Long-term investment results in benefits to accrue to the company in excess of one year while operating expenses benefits the company only within the operating period.

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•

Enumerate examples of capital expenditure. •

Expand or enter into a new line of business

•

Replace or renew fixed assets

•

Construct new premises

•

Opening a new branch

•

Acquisition of machineries and equipment


Teacher tip “Shareholder’s wealth” is applicable to Corporations and “Owner’s wealth” is applicable to Single Proprietorships and Partnerships. Capital expenditure pertains to long-term investments.

Discuss the steps in Capital Budgeting. 1. Investment Proposal. Proposals for capital expenditure come from different levels within a business organization. These are submitted to the finance team for thorough analysis. 2. Review and Analysis. Financial personnel perform formal review and analysis to assess the benefits and cost of the investment proposals. These personnel make use of several financial tools which they see fit in evaluating the project.

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3. Decision Making. Companies usually delegate capital expenditure decisions on the basis of value limits. The analysis is presented to the proper approving body who will in turn make the decision on whether to push through with the project or not.

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4. Implementation. Release of funds and start of the project occurs after approval. Large expenditures are usually released in phases. 5. Monitoring. Results are monitored and actual cost and benefits are compared with those that were expected. Action may be required if deviations from the plan are significant in amount. Explain the risk and return trade-off.

•

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•

In making investment decisions, financial managers take note of the risk and returns of the projects they are entering. Recall the story of Jack and the Beanstalk. In the story, Jack trades his cow for three magic beans. This is a very risky move for Jack since these beans may be fake and therefore, worthless. Luckily those magic beans grew into beanstalk that gave Jack the opportunity to gather riches beyond his wildest dreams, while fighting with a giant along the way. Jack gambled in this transaction. Should Jack decide not to sell the cow for magic beans and instead sold it at the current market value, the story would be different. As we can see, the higher the risk, the higher the returns, but of course, if turned sour, the higher the losses as well. This situation is also true for making financial decisions. Taking a higher risk gives you the opportunity to earn higher returns. Low risk investments like treasury notes, also called risk-free instruments, earn a low and steady income flow. In making investment decisions, financial managers ensure that the proposed business will earn more than the risk-free rate since they need to compensate for the risk the investment will entail. This introduces us to the Required Rate of Return. It is the minimum expected yield investors require in order to select a particular investment.

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•

Ask learners on how the risk and return trade-off can be applied in real life. 272 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Teacher tip You may share cases in investment scams (i.e. pyramiding) showing that high short term profit is usually accompanied by high risks. Whereas long term, hard-earned income is less susceptible to loss.

Sample Answers •

Fixed income vs. commission based income

•

Earning interest from time deposits vs. earning from stocks

•

Entering in a business with steady income vs. entering into seasonal high profit business

•

Investing in preferred vs. common stock

Enumerate and discuss the basic terminologies related to capital budgeting.

Unlimited Funds vs. Capital Rationing

The amount and availability of funds affects the company’s decisions in capital outlays. If the company has unlimited funds, then all projects which pass the risk-return criteria will be accepted and implemented. Otherwise, firms will operate under capital rationing and will accept only projects which provide the best opportunity to increase shareholder wealth.

Accept-Reject vs. Ranking Approaches •

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•

•

Independent Projects are those whose cash flows are independent of one another. The acceptance of one project does not eliminate the others from further consideration. Mutually exclusive projects, on the other hand, are projects which serve the same function and therefore compete with one another. The acceptance of one eliminates all other proposals that serve a similar function from further consideration.

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•

•

Teacher Tip

Independent vs. Mutually Exclusive Investments

The Accept-Reject approach is usually done for mutually exclusive projects where one project is favoured over the others. The approach accepts projects which pass a certain criteria. Ranking is done when there are several projects passing the criteria and the company is only able to fund so much. The highest ranking projects will be selected for implementation.

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•

PY

•

Introduce and explain the different techniques in capital budgeting •

Before proceeding with discussion of techniques, let us first introduce the concept of relevant cash flows. Relevant cash flows include the initial investment, cash inflows from income from the project, and the expected terminal value of the project, if any. These are the cash flows considered in analysing whether an investment adds value to the firm. Cash flows should be net of tax. However, to simplify our discussion, we shall not include tax in 273


Example of an independent project: Refer to the PHP 8 million new restaurant outlet. If opportunities arise and financial resources permit, the company can open more outlets in other geographical areas. All of these new outlets can be considered independent projects. Example of a mutually exclusive projects: A big manufacturing company is contemplating on providing its own energy requirements. They are evaluating two investment proposals: 1) Oil-fired power generation plant or 2) Solar panels. Only one alternative can be considered because both plans will perform the same function.

our consideration. For example, Mr. Alfonse is deciding on which of the 2 mutually exclusive projects he should accept. Project A requires an initial outlay of PHP72,000 and is expected to receive PHP17,000 annually for the next 5 years. Project B, on the other hand, requires an investment of PHP80,000 but will earn PHP21,000 annually for the next 5 years. In this example, we can see that the relevant cash flows are the upfront investment and the annual income from investment.

PY

•

Teacher Tip:

•

Payback Method •

•

(21,000)

17,000

17,000

17,000

ED

(80,000)

17,000

(21,000)

(21,000)

(21,000)

17,000 explain the concept. Show the learners the solutions to the problems. Terminal value is the expected value of the asset/project at the end of its economic useful life.

(21,000)

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(72,000)

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Draw the timelines on the board to better

This is the simplest method used in capital budgeting. It measures the amount of time, usually in years, to recover the initial investment. To illustrate this method, let us use our previous examples for relevant cash flows. For Project A, the initial cash flow is PHP72,000. In 4 years, Mr. Alfonse would have generated a total cash flow of PHP68,000. To get the actual time period, let us divide the remaining amount (4,000)* and divide it by the cash flow for year 5. We get .24, so the total payback period for Project A is 4 + .24 = 4.24 years. Conversely, if the cash flows are equal, you may derive the answer by dividing the initial cash flow by the annuity, 72,000/17,000 = 274 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Teacher Tip: Computation of the PHP 4,000 Initial Cash Flow 72,000.00 Less: Annual Cash Flow (17,000 x 4) 68,000.00 4,000.00

4.24 years. Using this method for Project B, we get the payback period of 80,000/21,000 = 3.81 years. •

Let us also illustrate an example of computing the payback period for uneven cash flows.

Initial Investment = 15,000

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Year 1 = 7,000 Year 2 = 4,000 Year 3 = 6,000

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Year 4 = 3,000

For years 1 and 2, we have already recovered 11,000 of our investment. We need 4,000 more to reach 15,000 thus for the third year, we have 4,000/6,000 = 0.67. The payback period is 2.67 years. Notice that the cash flow for year 4 is already ignored.

•

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Managers usually set an acceptable payback period for projects. For making accept-reject decisions, projects which meet the set acceptable payback period shall be accepted and those which not are discarded. It is a popular method used especially for small projects due to its simplicity and consideration for the timing of cash flows. The criticism of this method, however, it that it does not consider the time value of money. Also, it fails to consider the cash flows after the payback period. For instance, in our previous example, we can see that Project B is better compared to Project A due to the quick recovery of the investment. If Project A has a cash flow of, let’s say PHP50,000 at year 5, we can easily deduce that Project A is more profitable. However, the payback method only recognizes the gains during the payback period.

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•

Net Present Value (NPV) •

This method is more sophisticated than the payback method since it considers the time value of money and it considers all the cash flows during the life of the project including the terminal value. The NPV can be computed by comparing the present value of cash inflows against the present value of cash outflows. Cash flows are discounted using the firm’s cost of 275


Teacher Tip: Ask the learners recall their lessons in computing the present value since the NPV uses the same concept. Have their PV tables ready.

capital (cost of acquiring funding needs) to get the present values. NPV = Present value of cash inflows – present value of cash outflows If the NPV of a project is zero or positive, it should be accepted. In finance, if these projected cash flows are realized, the NPV of the project should be equivalent to the increase in total shareholder’s value.

•

Assuming that the cost of capital is 8%, let us compute the NPV for our previous example.

PY

•

Ask the learners to compute for the NPV of Project B.

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Project A = 17,000 x PVAF(3.993) – 72,000 = 67,881 – 72,000 = (4,119)

Project B = 21,000 x PVAF(3.993) – 80,000 = 83,853 – 80,000 = 3,853

Internal Rate of Return (IRR) •

The IRR is one of the most widely used techniques in capital budgeting. It is defined as the discount rate that equates the NPV of an investment to zero. If this method is used for capital budgeting analysis, the project’s IRR is compared to the company’s cost of capital. If the IRR is greater than the cost of capital, the project should be accepted otherwise, it should be rejected. Manual computation of the IRR involves trial and error, however, this IRR computation is a lot easier using computation applications like MS Excel.

•

For example, you are planning to build a branch for your business at PHP350,000 and expect to receive PHP400,000 in 1 year. First, compute for the rate of return (profit/investment).

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•

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We can see that Project A’s NPV is negative and Project B’s NPV is positive, thus, we only accept project B.

Rate of return = 50,000/350,000 = 14.3% 276 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

•

We compute for the rate of return because the NPV of a project with cost of capital equal to the rate of return is equal to zero. To illustrate:

NPV = 400,000/(1+0.143) – 350,000 = 0 The IRR can easily be computed using MS Excel using the IRR function.

•

The NPV and IRR are interrelated techniques. An IRR greater than the cost of capital equates to a positive NPV and vice versa. On a purely theoretical view, NPV is the better measure since it measures the actual cash value a project creates for shareholders. However, IRR is also a widely used tool since financial managers usually like to think in terms of ratios and percentages.

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•

PRACTICE (30 MINS)

Year 0 1 2

Project Pizza

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(EASY)

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Ask the learners to answer the following exercise. This can be given as a short quiz at your discretion.

(100,000) 50,000 50,000

1. Given the cash flows above and a discount rate of 5%, compute the payback period and NPV of Project Pizza. 2. If PHP50,000 is earned on the 3rd year of the project, what is the new NPV of the project? What is the payback period? 277 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Teacher tip Notice that Payback period does not change even if cash flows are added.

Answers Key: 1. NPV = (100,000) + 50,000/(1.05) + 50,000/(1.052) = PHP (7,029.48; Payback Period = 2 years 2. NPV = (100,000) + 50,000/(1.05) + 50,000/(1.052) + 50,000/(1.053) = PHP36,162.40; Payback Period = 2 years

Project A

Project B

0

(200,000)

(200,000)

1

80,000

100,000

2

80,000

100,000

3

80,000

100,000

4

80,000

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Year

PY

(AVERAGE TO DIFFICULT)

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3. If the opportunity cost of capital is 11%, which of these projects is worth pursuing? Find the NPV of both projects. 4. Suppose that you can only choose one of these projects. Which is more favourable to the firm given that the discount rate remains at 11%? (Which has the higher NPV) 5. Which project would you choose if the opportunity cost of capital were 16%? (NPV/IRR)

Answers Key:

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6. What is the payback period for each project?

3. Both. NPV is computed as follows.


Project A

NPV

Project B

NPV

0

(200,000)

(200,000.00)

(200,000)

(200,000.00)

1

80,000

72,072.07

100,000

90,090.09

2

80,000

64,929.79

100,000

81,162.24

3

80,000

58,495.31

100,000

73,119.14

4

80,000

52,698.48 48,195.66

4. Project A, since it has a higher NPV. 5. Project B. NPV is computed as follows.

44,371.47

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Total

PY

Year

Project A

NPV

Project B

NPV

0

(200,000)

(200,000.00)

(200,000)

(200,000.00)

1

80,000

68,965.52

100,000

86,206.90

2

80,000

59,453.03

100,000

74,316.29

3

80,000

51,252.61

100,000

64,065.77

4

80,000

44,183.29

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Total

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Year

23,854.45

24,588.95


Teacher Tip:

6. Payback is computed as follows: Project A

Cumulative

Project B

Cumulative

0

(200,000)

(200,000.00)

(200,000)

(200,000.00)

1

80,000

(120,000.00)

100,000

(100,000.00)

2

80,000

(40,000.00)

100,000

-

3

80,000

40,000.00

100,000

4

80,000

120,000.00

C O

100,000.00

Project A = 2 years + 40,000/80,000 = 2.5 years or 200,000/80,000 Project B = 2 years or 200,000/100,000

ENRICHMENT (45 MIN) (DIFFICULT)

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Divide the class into groups with not more than six people each. Let them read and discuss the following case amongst themselves then discuss their answers in class. You can pick at least two groups to discuss their answers. Give them at most 30 minutes to prepare and discuss amongst them before discussing the correct answer in class. You are the investment manager of an appliance company. The industry is currently in the expansion face and the CEO would like to capture as much of the market share as possible. You asked your analysts to submit project proposals as summarized below.

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The best way to appreciate this topic is through the use of several exercises. This activity allows the learners to discuss among themselves. The case integrates what they have learned in present value and payoff

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Year

Project

Discount Rate

Investment

Annual Cash Flow

Project Life (Years)

A B C D E

10 12 8 8 12

3M 4M 5M 3M 3M

1M 1M 2M 1.5M 1M

5 8 4 3 6


Which projects should the manager choose? If you were given unlimited capital, which projects should be implemented? Answer key: Discount Rate

Investment

Annual Cash Flow

A B C D E

10% 12% 8% 8% 12%

3,000,000 4,000,000 5,000,000 3,000,000 3,000,000

1,000,000 1,000,000 2,000,000 1,500,000 1,000,000

Project Life (Years)

NPV

5 8 4 3 6

790,786.77 967,639.77 1,624,253.68 865,645.48 1,111,407.32

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Project

Rank 5 3 1 4 2

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If there is no budget constraint, all projects can push through since the NPV of all projects is positive. However, if there are budget constraints, projects will be chosen based on the highest NPVs in which case Projects C & E should be considered if you’re asked to choose two.


APPENDIX A Eli Lilly and Company Riding the Pipeline (Lawrence J. Gitman) Gitman, L. (2009). Principles of managerial finance. Boston: Pearson Prentice Hall.

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Companies spend money on new investments if they believe that those investments will later generate enough cash flow to justify the up-front cost. For pharmaceutical companies like Eli Lilly, the average length of time from the discovery of a new drug until delivery to a patient is 10 to 15 years. After R&D produces a promising lead, a drug is still a long way from being ready for human testing. Researchers must probe further to determine what dosage will be required and at what level it might be toxic to the patient. They also must explore practical issues such as whether Lilly will be able to manufacture the compound on a large scale. The clinical trials themselves can take years. To help recoup its investment, a drug manufacturer can get a 20-year patent that grants the company exclusive rights to the new drug. However, with the lengthy research and approval process, companies may have fewer than 10 years to sell the drug while the patent is in force. Once patent protection expires, generic drug manufacturers enter the market with low-priced alternatives to the name-brand drug.

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For Eli Lilly, the cost of bringing a new drug to market runs from $800 million to $1.2 billion. To keep its drug pipeline full, Eli Lilly plows some 20 percent of sales back into the R&D programs on which its future depends. With large cash expenditures occurring years before any cash return, the time value of money is an important factor in calculating the economic viability of a new drug.


APPENDIX B Cebu Pacific buying 16 ATR planes for $673 M By Lawrence Agcaoili (The Philippine Star)

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Agcaoili, L. (2015). Cebu Pacific buying 16 ATR planes for $673 M. philstar.com. Retrieved 11 April 2016, from http://www.philstar.com:8080/ business/2015/06/17/1466623/cebu-pacific-buying-16-atr-planes-673-m

MANILA, Philippines - Budget airline Cebu Air Inc. (Cebu Pacific) of taipan John Gokongwei is spending $673 million to acquire 16 more brand new aircraft from Toulouse-based turboprop aircraft maker ATR to meet the growing demand for inter-island services in the Philippines.

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Lance Gokongwei, president and chief executive officer of Cebu Pacific, said the acquisition of 16 ATR72-600 is in line with the low cost carrier’s vision of providing affordable air travel.

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”This order is an affirmation of our commitment to extend the convenience of affordable air travel to even more communities. We are very pleased to be the launch customer of this new configuration of the ATR 72-600, as this will allow us to offer our customers more seats at even lower fares,” he said.

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He pointed out Cebu Pacific has been operating ATR aircraft since 2008 enabling the budget airline to bring safe, reliable, and affordable air transport to smaller cities and islands throughout the Philippines. According to Cebu Pacific, the transaction would double the airline’s turboprop fleet size. It currently operates a fleet of eight ATR 72-500 aircraft that would be retired as the new aircraft enter service. Gokongwei said the entry into service of the ATR 72-600 would see Cebu Pacific with new generation aircraft to meet a growing demand in the Philippines for inter-island services. The aircraft were ordered from European turboprop aircraft maker ATR at the Paris Air Show. The deal also includes options to acquire an additional 10 ATR72-600. The aircraft is equipped with the high density Armonia cabin, the widest cabin in the turboprop market. 283 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

The aircraft features 78 slim-line seats and wider overhead bins with 30 percent more stowage space. These new technological innovations further enhance space and comfort for passengers. ATR aircraft enjoy a high reputation not only for versatility, but also for their ability to operate on short runways allowing Cebu Pacific to expand its operations not only on main airports but also to several other airports around the country.

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About 330 ATRs are currently operated by 55 airlines in the Asia-Pacific region. The ATR 72-600 has the lowest cost per seat mile in the 70-seat segment, with significantly lower fuel and maintenance costs compared to similar class aircraft.

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ATR chief executive officer Patrick de Castelbajac said the aircraft manufacturer is ”very happy to continue our partnership with one of the leading airlines in Southeast Asia and to contribute to the expansion of its network throughout the islands of the archipelago. ”Cebu Pacific will also be able to benefit from the vast support network for ATR operators in Asia. When their first ATR 72-600 arrives, there will be five ATR pilot training centers in the region,” he said.

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Cebu Pacific is undertaking a $4-billion fleet renewal program. It is scheduled to take delivery of seven more Airbus A320 and 30 A321neo between this year and 2021. It has a fleet of 55 aircraft composed of 10 A319, 31 A320, six Airbus A330, and eight ATR-72 500 aircraft.

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Meanwhile, the low cost carrier arm of national flag carrier Philippine Airlines Inc. (PAL) of taipan Lucio Tan is set to fly to Saipan in Northern Marianas two times a week using the 156-seater Airbus A320 aircraft. PAL Express said it intends to attract Saipan residents to fly to Manila and interconnect to any of the PAL Group;s domestic and international destinations. There are about 19,000 Filipinos living and working in Saipan. ”Our goal is to address the clamor for new routes in order to best serve the needs of the market. As we tap new markets and build on existing ones, we aim to ensure connectivity across the route network of the PAL Group by providing the required flight frequencies and schedules,” the airline said.


Business Finance

Introduction to Investment pt.1

• •

Identify the types of investments particularly bank deposits, insurance, real estate, hard assets, mutual funds, and stocks and bonds. Indicate the advantages and disadvantages of each type of investment. Explain the risks inherent in each type of investment.


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Compare and contrast the different types of investments. (ABM_BF12IVm-n-23) Classify investments according to its type, features, and advantages and disadvantages. (ABM_BF12-IVm-n-24)

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Specific Learning Outcomes At the end of the unit lesson, the learners shall be able to: • •

Introduction Identify essential questions and

15

Motivation

15

communicate learning competencies and objectives.

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LESSON OUTLINE

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Content Standards The learner demonstrates an understanding of the definition, purpose, kinds, advantages and disadvantages, and the risks of investment.

240MINS

Present historical returns of different types of investments and how much the learners’ savings could have become

Instruction/ Give a lecture on the different types of Delivery Practice

investments and their advantages/ disadvantages

Group portfolio management exercise

30

Enrichment Tell stories of people who became rich

30

through investing


Quiz projector, of available; if projector not available, board and markers will suffice; scientific calculators; PV Tables

Resources (1) Finance Websites

Describe how they want to allocate their savings on different types of investments. Explain why they want such investment allocation based on the advantages and disadvantages of each chosen investment type.

120

(2) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex Bookstore.


30

INTRODUCTION (15 MINS) 1. Identify the essential questions:

Teacher Tip

Ask the learners if they have savings

•

Why do they save?

•

Where will they put their savings?

•

Supposing they have PHP1 million, where will they put it?

•

Are they aware of alternative investment options (stocks, bonds, mutual funds, etc.)?

•

Are they familiar with investment scams (double-your-money, high-yield investments, etc.)?

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Enumerate the learning competencies. • Identify the types of investments particularly bank deposits, insurance, real estate, hard assets, mutual funds, and stocks and bonds. • Indicate the advantages and disadvantages of each type of investment. • Explain the risks inherent in each type of investment. Enumerate the specific learning outcomes. • Describe how they want to allocate their savings on different types of investments. • Explain why they want such investment allocation based on the advantages and disadvantages of each chosen investment type.

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2. Transition by saying that these questions will be answered by meeting the following objectives throughout the discussion. 3. Communicate learning competencies and objectives

• Emphasize that the discussion offers a change in perspective. During the 3rd quarter, the learners took on the perspective of a borrower. For the 4th quarter, the learners will take on the perspective of a lender or investor. • On the essential questions, try to get as many insights from the learners as possible. • On question 6, say that investment scams normally offer returns too good to be true.

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Teacher Tip Make the students appreciate the difference between investing in assets that appreciate versus things that depreciate in value over time.


MOTIVATION (15 MINS) Holding Period

Value of PHP 10,000 Today

% Return

Bank (Time deposit)

10 years

PHP14,000

40%

Stocks (Universal Robina Corporation “URC”)

10 years

PHP140,500

1,305%

Stocks (DMCI Holdings, Inc. “DMC”)

12 years

PHP3,204,878

31,949%

Mutual funds (Philequity PSE Index Fund)

5 years

PHP23,426

134%

Mutual funds (Sunlife Prosperity Philippine Equity Fund)

5 years

PHP20,805

108%

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Investment Type

1. Show how the learners’ savings (i.e. PHP10,000) could have grown under different types of investments.

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Table 1: Comparison of Investment Types Over Time with Sample Results Sources:

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(1) Funds, M. & Tour, A. (2016). Philpad - Your pad on anything Filipino.... Philpad. Retrieved 2 May 2016, from http://philpad.com; (2) Home | Thomson Reuters. (2016). Thomsonreuters.com. Retrieved 2 May 2016, from http://thomsonreuters.com/en.html; (3) Welcome to the Bangko Sentral ng Pilipinas Website!. (2010). Banko Sentral ng Pilipinas. Retrieved 2 May 2016, from http://www.bsp.gov.ph/; (4) Writer Estimates


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Bank (Time Deposit)

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Stocks (Universal Robina Corporation “URC”)


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Stocks (DMCI Holdings, Inc. “DMC”)

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Mutual funds (Philequity PSE Index Fund and Sunlife Prosperity Philippine Equity Fund)

Teacher Tip If you are successful in motivating them, you should get more students raising their hands to volunteer their answers for assets that grow their money over those which lose their value. 289


2. Describe how money loses value in buying material things such as toys, gadgets, etc. Purchase Price

Holding Period

Value Today

% Return

iPhone 4 32gb

PHP29,200 (October 2011)

3.5 years

PHP8,900

-70% return

PlayStation 4

PHP22,500 (November 2013)

1.5 years

PHP18,000

–20% return

Toyota Vios

PHP850,000 (December 2007)

7.5 years

PHP300,000

-65% return

Table 2: The Decline of the Monetary Value of Material Items Sources:

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(1) Business 2 Community - Top Trends, News & Expert Analysis. (2016). Business 2 Community. Retrieved 2 May 2016, from http://www.business2community.com/#MBqWp2Ki7czkuqWl.97; (2) GSMArena.com - GSM phone reviews, news, opinions, votes, manuals and more.... (2016). Gsmarena.com. Retrieved 2 May 2016, from http://gsmarena.com ; (3) OS X Daily - News and Tips for Mac, iPhone, iPad, and Everything Apple. (2016). Osxdaily.com. Retrieved 2 May 2016, from http:// osxdaily.com; (4) Writer Interviews

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1. Introduction

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3. Ask the learners which would they prefer, those which grow their money or those which lose value? Survey the students by asking them to raise their hands on the option they prefer.


Definitions:

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Say that for the discussion, the different types of investments will be grouped into three: (1) fixed income and equities, (2) alternatives to fixed income and equities, (3) other investment assets


Settlement Risk – risk that the bank may not be able to give back their deposit. Philippine banks are normally insured by the Philippine Deposit Insurance Corporation (PDIC). Depositors may recover up to PHP500,000 per depositor from PDIC in case of bank default/bankruptcy.

Misconceptions: Emphasize to the students that it is a common misconception that all of these investments will earn for certain. Clarify that each investment type has inherent risks involved, which nevertheless can be mitigated.

2. Fixed Income and Equities Investment Type

Advantages

Disadvantages

Stocks (Equity) “Type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings”

• Unlimited Upside

Bank Deposits (Fixed Income) “Money placed into a banking institution for safekeeping”

• Known income based on • Lower interest income vs. bonds outstanding principal • Settlement risk if the bank closes and current interest rate • Shorter, if any, holding period vs. bonds

Bonds (Fixed iIcome) “Debt investments where an investor loans money to an entity which borrows the funds for a defined period of time at a variable or commonly, fixed interest rate”

• Known periodic payments for a certain period of time • Can’t lose money if bond investment is held until maturity

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• No guaranteed returns. • Riskiest of all assets (can lose even more than 50% of their money in one day)

• If not held until maturity and preterminated, investor can gain or lose depending on the prevailing interest rates at the time of pre-termination. If interest rates are higher, investor in bonds can lose in the pre-termination

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Table 3: Advantages and Disadvantages of Fixed Income and Equities Sources:

(1) Investopedia - Sharper Insight. Smarter Investing.. (2016). Investopedia. Retrieved 2 May 2016, from http://investopedia.com; (2) Writer Inputs

• Ask the learners which would they prefer, equity or fixed income? • Supposing they have PHP1 million, how will they allocate it? • Explain how they can access these investment assets through the following: • Stocks • Go to a stock brokerage firm (i.e. COL Financial, AB Capital Securities, etc.) or a bank with a stock brokerage arm (i.e. BPI Trade, First Metro Securities, etc.) and open a stock market account by signing the necessary account opening forms. 291 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

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• Minimum capital amount, depending on the broker, will be required to be deposited to successfully open the account (i.e. PHP5,000 for BPI Trade, PHP10,000 for AB Capital Securities, etc.). • Most of these stock brokerage firms now provide online access to their client’s stocks account (i.e. www.colfinancial.com, www.bpitrade.com, www.abcapitalsecurities.com.ph, etc.). • Bank Deposits • Go to a bank (BDO, BPI, Metrobank, etc.) and open a bank account (savings, time deposit, etc.) by signing the necessary account opening forms. • Minimum amounts will also be required depending on which bank and the type of bank deposit they want to open. • Some banks also now offer online access to their client’s bank accounts (i.e. www.bpiexpressonline.com, www.bdo.com.ph, www.lbpiacces.com, etc.) where they can monitor their account, pay bills, transfer funds, etc. via internet. • Bonds • Same as bank deposits, go to a bank and sign the necessary bond acquisition forms. • Minimum purchase of bonds is normally higher relative to stocks and bank deposits. • Clients may also view their bond’s performance online depending from which bank they bought it from. 3. Alternatives to fixed income and equities (25 minutes)

Advantages

Disadvantages

Mutual funds “An investment that is made up of a pool of funds collected from many investors for the purpose of investing in stocks, bonds, and similar assets”

“Give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult (if not impossible) to create with a small amount of capital”

• Pay management fees • Values can also fluctuate just like the stock market

Unit investment trust fund (UITF) Similar to a mutual fund but is managed by banks.

• Same as mutual funds. • Easier access because clients can open an account in any branch of the bank near them. • No entry and management fees.

No shareholder rights for investors such as dividends and voting rights.

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Investment Type

Definitions:

Table 4: Advantages and Disadvantages of Alternative Investments 292 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

• Management Fee – the amount clients pay to the professionals who manage their mutual funds, normally a certain percentage of portfolio value. • Dividends – distribution of the company’s income to its shareholders. • Voting Rights – right to be heard on certain policies that the company wants to implement.

Sources: (1) Funds, M. & Tour, A. (2016). Philpad - Your pad on anything Filipino.... Philpad. Retrieved 2 May 2016, from http://philpad.com; (2) Investopedia - Sharper Insight. Smarter Investing.. (2016). Investopedia. Retrieved 2 May 2016, from http://investopedia.com; (3) Writer Inputs

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• Ask the learners if they would prefer these alternatives over equity or fixed income and why. • Would they prefer experts managing their money for them for a fee over investing on their own? • Explain how they can access these investment assets through the following: • Mutual funds • Go to an insurance company or a financial institution that offers mutual funds (i.e. Philequity, Sunlife, Manulife, etc.) and sign the necessary account opening forms. • As with stocks, minimum amounts will be required to successfully open the account. • Some of these financial institutions also provide online access to monitor their mutual fund performance. Unit Investment Trust Fund • • Same procedures as a mutual fund except that UITF’s are accessed through banks.


4. Other investment assets Investment Type

MUST READ FIRST Advantages

Disadvantages

• Largest market in the world in terms of • Volatile and trades 24-hours a day trading volume, so much liquidity (must be closely monitored) • Unlike stocks, commodities, etc., • Generally uses margin trading currency asset itself is a medium of which allows clients to bet more exchange which people can use to than their capital (may also be an transact advantage)

Commodities “A basic good used in commerce that is interchangeable with other commodities of the same type” (i.e. gold, nickel, oil)

• Natural hedge against inflation • Negatively correlated with equities and bonds (may be used for diversification) • Hedge against geopolitical risks

Real Estate “Land and any improvements on it” (i.e. land, house and lot, condominiums)

• Generally appreciates over time because land gets scarce • Have relatively low correlations with other asset classes (may be used for diversification) • Can be a source of recurring rental income • May also be a hedge against inflation because of inflation-linked rent escalation clauses

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• Same as currencies • Impractical to invest directly considering storage, transportation and insurance costs involved

• Huge capital needed, financing can be difficult • Maintenance of the property needed to preserve its value • Illiquid or difficult to sell

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Insurance “A contract (policy) in which an individual or entity receives financial protection or reimbursement against losses from an insurance company” (i.e. life insurance, educational plans, VUL)

• Liquidity – ability to be converted into cash, the higher the liquidity the better. • Margin Trading – allows clients to trade more than their capital. It can magnify both earnings and losses. • Inflation – general increase in prices. • Hedge – investment that reduces the risk of adverse price movements in an asset. • Diversification – process of investing in different kinds of assets to lessen exposure in market/price volatility. • Geopolitical risks – “risks of one country's foreign policy influencing or upsetting domestic, political, and social policy in another country or region” (Source: Columbia Threadneedle Blog. (2016). Columbia Threadneedle Blog. Retrieved 2 May 2016, from http:// blog.columbiathreadneedleus.com) • Correlation – how price of an asset moves with respect to another asset (i.e. positive correlation if both assets move in the same direction, negative correlation if both assets move in the opposite direction) • Escalation Clause – agreement to raise prices in the future depending on certain circumstances (i.e. increase in inflation leading to higher rental rates). • Insurance Premium – the amount paid on a regular basis to the insurance company in return for the insurance/protection provided. • VUL – Variable Universal Life insurance or a life insurance that offers both death benefit and investment features.

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Currencies “Generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy” (i.e. USD, EUR, JPY)

Definitions:

• Gives the insured individual/entity the cash/capital to deal with unforeseen adverse financial consequences • May provide certain tax benefits (i.e. tax deductibility, tax-free provisions)

• Insurance premiums may be costly • On some of traditional insurance plans, no sickness/death until a certain age may mean not getting any benefits at all (that’s why VUL’s are now very prevalent) • Some insurance companies can go bankrupt (i.e. College Assurance Plan) if companies fail to factor 294 significantly adverse unforeseen This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only. circumstances

Table 5: Advantages and Disadvantages of Other Investment Types Sources:

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(1) Gateway Financial | Gateway Financial. (2016). Gatewayfinancial.biz. Retrieved 2 May 2016, from http://gatewayfinancial.biz; (2) Home Guides | SF Gate. (2016). Homeguides.sfgate.com. Retrieved 2 May 2016, from http://homeguides.sfgate.com; (3) Investopedia - Sharper Insight. Smarter Investing.. (2016). Investopedia. Retrieved 2 May 2016, from http://investopedia.com; (4) Saad, Y. & Slachevsky, A. (2016). From The Markets - eToro Blog. eToro Blog. Retrieved 2 May 2016, from http://etoro.com/blog/ markets; (5) Writer Inputs

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• Ask the learners which among these investment assets would they consider and why. • Explain how they can access these investment assets through the following: • Currencies and Commodities • Open a foreign currency/forex account (i.e. oanda, fxcm, cboe, etc.) online. • Minimum amount required for forex accounts vary and are usually higher vs. stocks and usually in USD. • Investments may also be monitored online. • Real Estate • Contact/visit real estate companies directly (i.e. Ayala Land, Megaworld, SM Prime, etc.). • Contact real estate brokers. Insurance • • Contact/visit insurance companies directly (i.e. Sunlife, Prulife, Manulife, etc.). • Contact insurance agents.

Teacher Tip: Emphasize the importance of contacting licensed real estate brokers and insurance agents.

Teacher Tip:

5. Investment Scams (10 minutes)

• Tell the learners the following characteristics of investment scams (Source: financialmentor.com): • Unexpected and unsolicited phone calls, emails, letters, or personal visits from strangers who are offering investments • Above market returns • Low risk, no risk, or a guarantee • Giving custody and possession of invested capital to the investment manager 295 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Show samples of investment scams like email scam or even text scams. You may visit this website for an example: > http:// www.motherjones.com/politics/2014/03/ what-i-learned-from-nigerian-scammers.

PRACTICE (30 MINUTES) (AVERAGE)

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Group portfolio management exercise.

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• Aggregating assets into a pool with other investors • Investing on the spot • Special connections, secrets, or inside information not available to the public • Invitations to join exclusive investment organizations • Opportunities for the “next big thing” or a “once in a lifetime” deal • Sophisticated terminologies • Investments offered from overseas • No prospectus/offering memorandum • Investments that cannot be verified • Sold by unlicensed/unregistered people • Troubles cashing out of the investment • Salespeople discouraging second opinion • Salespeople encouraging investing on the basis of trust • Salespeople asking potential clients to put their life savings into a single investment • Salespeople encouraging potential clients to borrow money for it • Salespeople requesting for the client’s bank account details • Ask how they can prevent themselves from becoming victims to investment scams

1. Group the students into teams of four to five.

2. Provide the students with investment options based on current market prices (sample presented below). 3. Ask each group to allocate a fund of PHP1,000,000 among the different investment options provided and why. 4. (Optional) Tell the students that each group’s fund will be evaluated after 2-3 weeks based on the funds’ updated market value. 5. (Optional) Give a prize or grade incentive to the team with the highest portfolio value. 296 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Teacher Tip The objective of this activity is to make the learners rationalize the composition of their chosen portfolio. Updated prices of the investment options can be taken from the following websites: • For URC, DMC and PSEi-linked mutual fund, www.pse.com.ph • For time deposit, it should be the same for the next 2-3 weeks • For gold, www.kitco.com

Sample Investment Options Sheet Instructions: Allocate your PHP1,000,000 among the following investment alternatives (in multiples of 10% i.e. 10%, 20%, 30%, etc.). Allocations Investment Asset

Market Price (September 17, 2015)

5-Year Average Annual Return

URC (Stocks)

PHP191.0

68.6%

___%

DMC (Stocks)

PHP12.9

36.1%

___%

Time deposit

1.18%

2.3%

___%

PSEi-linked mutual fund

7,123.99

17.3%

___%

Gold (Commodity)

$1,118.6

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Allocation

-59.3%

should total 100%. Below the table, justify your chosen allocations.

Source:

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(1) Home | Thomson Reuters. (2016). Thomsonreuters.com. Retrieved 2 May 2016, from http://thomsonreuters.com/en.html; (2) Kitco: Live Gold Prices | Gold News | Gold Market Insights. (2016). Kitco.com. Retrieved 2 May 2016, from http://kitco.com; (3) THE PHILIPPINE STOCK EXCHANGE, INC.. (2016). Pse.com.ph. Retrieved 2 May 2016, from http://pse.com.ph; (4) Welcome to the Bangko Sentral ng Pilipinas Website!. (2010). Banko Sentral ng Pilipinas. Retrieved 2 May 2016, from http://www.bsp.gov.ph/


1. Share the story of Warren Buffett through a biography video (Warren Buffett: Bio of the World's Greatest Businessman. (2016). YouTube. Retrieved 2 May 2016, from https://www.youtube.com/watch?v=yUfUMymDVyo) 2. Emphasize to the learners that at their age, they have the most valuable asset in investing – time (cite Warren Buffet who started investing at the age of nine, and felt it was even too late. He is now one of the richest men in the world.) 3. Ask them if they want to be like Warren Buffett. 4. Encourage them to invest as early as now. 297 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

EVALUATION (30 MINUTES) QUIZ

Teacher Tip

Sample Matching Type Quiz

Depending on the reception of the students of the lesson, essay questions may be given instead of multiple choice.

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1. (EASY) Match the investment asset in column A with its description in column B by writing the capital letter on the left side of column A.

Answer Key

(A) Investment Asset

(B) Description

Stocks (Equity)

A. An investment that is made up of a pool of funds collected from many investors for the purpose of investing in stocks, bonds, and similar assets.

___2

Bank Deposits (Fixed Income)

B. Land and any improvements on it.

___3

Mutual Funds

C. Type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings.

___4

Real Estate

D. A contract (policy) in which an individual or entity receives financial protection or reimbursement against losses from an insurance company.

___5

Insurance

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E. Money placed into a banking institution for safekeeping


If Matching Type Part 1: C, E, A, B, D Part 2: D, B, E, C, A

2. (EASY) Match the investment asset in column A with its advantage/disadvantage in column B by writing the capital letter on the left side of column A. Sample Matching Type Quiz (A) Investment Asset

(B) Advantage/Disadvantage

Stocks (Equity)

A. Disadvantage: On some of traditional plans, no sickness/death until a certain age may mean not getting any benefits at all

___2

Bank Deposits (Fixed Income)

B. Advantage: Shorter, if any, holding period vs. bonds

___3

Mutual Funds

C. Advantage: Can be a source of recurring rental income

___4

Real Estate

D. Disadvantage: Riskiest of all assets (can lose as much as 50% of their money in one day)

___5

Insurance

E. Disadvantage: Pay management fees

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3. (Optional) Essay

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(DIFFICULT) Sample Essay Questions

If Essay (Suggested Answers) 1. Equities are the riskiest of all assets because of their price volatility. In the Philippine Stocks Exchange, clients can lose as much as 50% on a stock in one day. Reasons why stock prices are volatile include uncertainties in company’s earnings, negative or positive market sentiment of investors, etc. And with these great risks comes the potential for great upside for the risk-taker investor.

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Answer Key

1. Why would a risk-taker (likes to take risks) type of investor prefer equities over fixed income? 2. Why would a risk-averse (likes to avoid risks) type of investor prefer fixed income over equities? 3. How do mutual funds differ from UITFs?

4. If let’s say you have PHP1,000,000 today which you can invest for the next 10 years, where will you put it and why?


2. Fixed income assets are low-risk investments. Even if potential returns are low relative to equities, it gives the riskaverse investor known income/periodic payments. Note however that this is only true if the security is held until maturity. Default risk, which is the risk of the counterparty not fulfilling his obligation is also present in fixed income assets. Therefore, an investor must carefully analyze the issuer and must be convinced about its financial stability before buying its debt security. 3. Mutual funds are offered by non-bank institutions while UITFs are offered by banks. Given that UITFs are offered by banks, they are more accessible than mutual funds. Mutual funds on the other hand require management fees but provide the investors with shareholder rights such as dividends and voting rights. Since the underlying asset of mutual funds can also be equity, returns are not guaranteed and an investor can also lose. 4. Note to teacher: They can put it in one investment instrument or it can be a portfolio. Whatever the answer is, there has to be an explanation.

Business'Finance

120 MINS

Introduction to Investment LESSON OUTLINE Introduction Identify essential questions and

PY

Content Standards The learners demonstrate an understanding of the definition, purpose, kinds, advantages and disadvantages, and the risks of investment.

communicate learning competencies and objectives


Motivation

C O

• Identify the types of investments particularly bank deposits, insurance, real estate, hard assets, mutual funds, and stocks and bonds. • Indicate the advantages and disadvantages of each type of investment. • Explain the risks inherent in each type of investment.

Present how volatile some investments can become and ask learners if they are willing to take such risk on their money

10

10

60

Learning Competency The learners shall be able to measure and list ways to minimize or reduce investment risks in simple exercises. (ABM_BF12-IVm-n-25)

Enrichment Share accounts of erroneously quantified

10


Materials

D EP

ED

Instruction/ Give a lecture on the different ways on Delivery

• Measure the risk of different types of investments • Identify ways on how to reduce investment risk and define how risk is lessened

quantifying investment risk and how to reduce it risks and how terrible the effects can be

Evaluation

Quiz • LCD projector • Laptop with Microsoft Office Powerpoint or • Overhead Projector • Acetates

Resources (1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex Bookstore. (2) Finance Books and Websites


30

INTRODUCTION (10 MINS)

Teacher Tips: On the essential questions, try to get as much insights from the learners as possible The previous module recognized the rewards/returns of the various investments. Emphasize that this module will focus on the risks particularly on equity investments.

C O

PY

1. Identify the essential questions • Ask the learners what are the different types of investments that they have learned (this will also serve as a review). • Do they understand the risks of each investment? • Do they know how to measure these risks? • Which will they choose, a stock which they can expect to go up by 25% in one year, or a 1-year treasury bill which will give them 1.5% return? Note that if the economy turns bad, they can lose 10% on the stock. • If there is a way to minimize these risks, will that help them in investing? 2. Transition by saying that these questions will be answered by meeting the following objectives throughout the discussion.

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3. Communicate learning competencies and objectives. • Explain that the learning competencies will be the same as the previous module but this module will focus more on the quantification of risks in each investment. • Enumerate the specific learning outcomes. - Measure the risks of different types of investments. - Identify ways on how to reduce investment risks and define how risk is lessened.

MOTIVATION (10 MINUTES)

Teacher Tips:

1. Show how the learners’ savings (i.e. PHP10,000) could have changed value over time if placed in a bank time deposit and an equity investment.

Let the students appreciate the difference between low-risk low-return investments and high-risk high-return investments. The PSEi is composed of the 30 biggest companies in the Philippines. These companies are as follows (Source: The Philippine Stock Exchange, Inc.. (2012). The Philippine Stock Exchange, Inc.. Retrieved 8 May 2016, from http://www.pse.com.ph/ stockMarket/home.html):


1. Ayala Corp. (AC) 2. Aboitiz Equity Ventures, Inc. (AEV) 3. Alliance Global Group, Inc. (AGI) 4. Ayala Land, Inc. (ALI) 5. Aboitiz Power Corp. (AP) 6. BDO Unibank, Inc. (BDO) 7. Bloomberry Resorts Corp. (BLOOM) 8. Bank of the Philippine Islands (BPI) 9. DMCI Holdings, Inc. (DMC) 10. Energy Development Corp. (EDC) 11. Emperador Inc. (EMP) 12. First Gen Corp. (FGEN) 13. Globe Telecom, Inc. (GLO) 14. GT Capital Holdings, Inc. (GTCAP) 15. International Container Terminal Services, Inc. (ICT) 16. Jollibee Foods Corp. (JFC) 17. JG Summit Holdings, Inc. (JGS) 18. LT Group, Inc. (LTG) 19. Metropolitan Bank & Trust Company (MBT) 20. Megaworld Corp. (MEG) 21. Manila Electric Company (MER) 22. Metro Pacific Investments Corp. (MPI) 23. Petron Corp. (PCOR) 24. Robinsons Land Corp. (RLC) 25. Semirara Mining and Power Corp. (SCC) 26. SM Investments Corp. (SM) 27. San Miguel Corp. (SMC) 28. SM Prime Holdings, Inc. (SMPH) 29. PLDT (TEL) 30. Universal Robina Corp. (URC)

C O

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Bank (Time Deposit)

Table 1: Sample Performance of PHP 10,000 in Time Deposit

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ED

Stocks/Equities (Philippine Stock Exchange Index “PSEi”)

Table 2: Sample Performance of PHP 10,000 in Stocks/Equities 302 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Teacher Tips: Optional: Illustrate how the learners’ PHP10,000 could have changed value over time if placed in Jollibee Foods Corp. (“JFC”) and Philex Mining Corporation (“PX”).

PY

2. Explain the concept of risk and return. • Investments follow a high-risk, high-return principle. • Inform the learners that stocks are volatile and that they can lose significantly from their investments especially if their investment timeframe is short. • If the stock investments of a good company is invested over a much longer period of time however, stock investments can be financially rewarding as shown in the PSEi returns. • The value of a bank investment on the other hand, follows a relatively straight upward line, but only gives low returns (CAGR of 3.4% for the period 2004-2014) due to the low risk taken by the investor.

C O

3. Discuss that some will choose bank time deposit and others will prefer stocks. Emphasize that there is no right or wrong answer because the choice of an investor depends not just on returns but also on his/her risk appetite. 4. Ask the learners: If they have savings, would they put it in stocks or in a time deposit? Survey the students by asking them to raise their hands on the option they prefer.

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5. Ask the learners: If there is a way to measure the risk, will it help them decide whether to place their money in an investment or not?

Company description: JFC is a multinational chain of fast food restaurants famous for its Chickenjoy, Jolly Spaghetti, and Peach Mango Pie. PX on the other hand, is the largest mining company in the Philippines with gold and copper mining properties in Benguet and Surigao. It is advisable for the teacher to read more about risk.


If the learners are motivated, they should be curious about how to quantify risk.


2. Systematic and Non-Systematic Risk (10 minutes) Also Known As

Examples

Systematic

Uncertainty inherent to the entire market

Market risk, undiversifiable risk

Changes in interest rates, recession, wars

Measurement

C O

Definition

Beta (β)

Rumors of a Standard deviation potential default, (σ) less beta labor strikes, landslide in a mining company that disrupted the operations

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Uncertainty that Specific risk, comes with the diversifiable risk, company or industry residual risk

Explain that there are other ways of measuring risk but focus will be on standard deviation and beta.

Teacher Tips:

Risk

Non-systematic

Teacher Tips:

PY

1. Definition of risk. • “Risk is the chance that an investment’s actual return will be different than expected. Risk includes the possibility of losing some or all of the original investment.” (Source: Investopedia - Sharper Insight. Smarter Investing. | Investopedia. (2016). Investopedia. Retrieved 8 May 2016, from http:// investopedia.com)

Table 3: Differentiating Risks Source: Investment Strategies, Education & News | InvestingAnswers. (2016). Investinganswers.com. Retrieved 8 May 2016, from http://investinganswers.com; Investopedia - Sharper Insight. Smarter Investing. | Investopedia. (2016). Investopedia. Retrieved 8 May 2016, from http://investopedia.com


Emphasize that systematic risk is nondiversifiable while non-systematic risk is diversifiable. Note that total risk = systematic + nonsystematic risk.

3. Measuring Systematic and Non-Systematic Risk (40 minutes) Risk it Measures

Definition

Beta (β)

Systematic risk

• Measure of the systematic risk of an investment or portfolio vs. the market as a whole. • Tendency of an investment's returns to respond to swings in the market.

Total risk

• Sum of systematic and nonsystematic risk. • Total volatility of an investment.

ED

C O

Standard deviation (σ)

Formula

Teacher Tips: Note: Guide on β interpretation below: • =1 – investment’s price will have the same volatility as the PSEi • >1 – investment’s price will be more volatile than the PSEi • <1 – investment’s price will be less volatile than the PSEi

PY

Measurement

Table 4: Measuring Risks Source: Investopedia. (2016). Investopedia. Retrieved 8 May 2016, from http://investopedia.com

D EP

• Explain that the formula for beta is the covariance of the investment asset’s returns with the returns of the market divided by the variance of the market. Beta can be easily computed through Microsoft Office Excel but due to the complexity of the formula in terms of manually computing beta, sources will be cited instead on where beta can be found. • Emphasize that in getting an estimate of the non-systematic risk, the total risk will be computed first then from this, the systematic risk will be deducted. • Clarify the components of the σ formula: - xi – return - x̄ – average of returns - n – no. of data points EASY for xi and x̄, AVERAGE for (xi-x̄)2, DIFFICULT for σ: Practice by computing the volatility (σ) of • the following stocks (equity investments): 305 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Example: A company with a β of 1.3 means that if the PSEi goes up by 10%, this company’s stock price, on the average, will go up by 13%. The reverse is true which means that if the PSEi goes down by 10%, this company’s stock price, on the average, will go down by 13%. Based on the example, it is illustrated that a company with higher beta is more volatile and a company with lower beta is less volatile. Clarify to the learners that the β computed using the formula given on the table may not be reliable if data points used are for a short period of time only. Using data covering five to ten years is suggested because such period will often cover the booms and busts of an economic cycle.

JFC

GLO

Year

Stock Price

Return xi x̄ (xi-x̄)

2

Teacher Tips:

Year

Stock Price

Return xi

x̄ (xi-x̄)

2

152.00

30/1/2014

1,710.00

28/2/2014

171.00

28/2/2014

1,700.00

31/3/2014

171.00

31/3/2014

1,664.00

30/4/2014

172.00

30/4/2014

1,657.00

30/5/2014

179.10

30/5/2014

1,690.00

30/6/2014

176.00

30/6/2014

1,600.00

31/7/2014

176.80

31/7/2014

1,735.00

29/8/2014

180.00

29/8/2014

1,800.00

30/9/2014

196.00

30/9/2014

1,623.00

31/10/2014

196.00

31/10/2014

1,685.00

28/11/2014

207.00

28/11/2014

1,750.00

29/12/2014

215.00

29/12/2014

1,730.00

σ

σ

C O

ED

D EP

Solutions are given in a separate spreadsheet included in this pack.

PY

30/1/2014

Note: Beta of investments assets, particularly of stocks, can be found on research engines such as Bloomberg and Thomson Reuters and studies of finance professors such as Aswath Damodaran of the NYU Stern School of Business.

Company Description: Globe Telecoms (“GLO”) is the telecommunications company of the Ayala group with products such as Globe Tattoo and promos such as Unli-text and Unli-surf. Universal Robina Corporation (“URC”) is the retail/consumer goods company of the Gokongwei group, famous for Jack and Jill chips and C2 green tea. DMCI Holdings (“DMC”) is the largest construction company in the Philippines owned by the Consunji family. It also has businesses in coal mining and power generation, property development, and nickel mining. Petron Corporation (“PCOR”) is the biggest oil refinery in the country owned by the Ang group. Some of its gasoline products include Petron Blaze and Petron Diesel Max. Emphasize that σ computed represents total risk. Note that formula for return should be: stock price current divided by stock price previous less 1. Clarify that n-1 is used as divisor because only a sample of data is used.


While total risk can be broken down to systematic and non-systematic risk, the breakdown formula is beyond the scope or coverage of this course.

URC

DMC

Year

Stock Price

Return xi x̄ (xi-x̄)2

Year

Stock Price

Return xi

x̄ (xi-x̄)2

116.000

30/1/2014

11.768

28/2/2014

139.000

28/2/2014

13.657

31/3/2014

141.000

31/3/2014

13.775

30/4/2014

145.000

30/4/2014

14.129

30/5/2014

148.000

30/5/2014

14.021

30/6/2014

153.000

30/6/2014

14.562

31/7/2014

161.000

31/7/2014

14.375

29/8/2014

161.000

29/8/2014

15.743

30/9/2014

186.000

30/9/2014

15.536

31/10/2014

185.000

31/10/2014

15.939

28/11/2014

194.000

28/11/2014

16.038

29/12/2014

195.000

29/12/2014

15.447

σ

σ

PY

30/1/2014

D EP

ED

C O


PCOR

Teacher Tips: Return xi x̄ (xi-x̄)

Alternative Presentation: Show the 3 sample portfolios and ask the learners to compare σ and allow them to discuss what it means. Emphasize the effect of diversification.

13.98

28/2/2014

13.74

31/3/2014

11.74

30/4/2014

12.28

30/5/2014

11.98

30/6/2014

12.74

31/7/2014

12.32

29/8/2014

11.66

30/9/2014

11.78

31/10/2014

11.82

28/11/2014

11.10

29/12/2014

10.60

σ

D EP

ED

30/1/2014

PY

Stock Price

C O

Year

2

4. Diversification (10 minutes) • To minimize investment risk, an investor has to have a diversified portfolio. The composition of the portfolio depends on the risk appetite of the investor. A more conservative investor (i.e. investor who has less appetite for risk) may have a portfolio which is more skewed to fixed income instruments like time deposits. On the other hand, an investor who has a higher appetite for risk (i.e. an investor who is more willing to take risk) may have a portfolio which is more skewed to equity investments. • Define diversification. 308 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Diversification is a risk management technique that combines a wide variety of investments within a portfolio to reduce risk. A welldiversified portfolio can eliminate non-systematic risk. • Cite examples of how a more diversified portfolio can reduce the standard deviation of the portfolio: Five-Stock PHP 10,000 Portfolio (JFC, GLO, URC, DMC, and PCOR)

Year

Portfolio Value

x̄

Return xi

(xi-x̄)2

30/1/2014

10,000.00

28/2/2014

11,427.60

14.3%

2.9%

31/3/2014

11,477.74

0.4%

30/4/2014

11,661.04

30/5/2014

Year

Portfolio Value

x̄

Return xi

PY

Two-Stock PHP 10,000 Portfolio (JFC and DMC)

30/1/2014

10,000.00

1.3%

28/2/2014

10,921.56

2.9%

0.1%

31/3/2014

10,647.87

1.6%

2.9%

0.0%

30/4/2014

11,848.70

1.6%

2.9%

0.0%

30/6/2014

11,976.59

1.1%

2.9%

0.0%

31/7/2014

11,923.45

-0.4%

2.9%

29/8/2014

12,609.95

5.8%

2.9%

30/9/2014

13,048.32

3.5%

2.9%

31/10/2014

13,219.55

1.3%

2.9%

28/11/2014

13,623.45

3.1%

29/12/2014

13,635.51

0.1%

2.9%

0.4%

-2.5%

2.9%

0.3%

10,859.22

2.0%

2.9%

0.0%

30/5/2014

10,981.69

1.1%

2.9%

0.0%

30/6/2014

11,122.52

1.3%

2.9%

0.0%

ED

C O

9.2%

31/7/2014

11,337.00

1.9%

2.9%

0.0%

0.1%

29/8/2014

11,593.20

2.3%

2.9%

0.0%

0.0%

30/9/2014

12,009.73

3.6%

2.9%

0.0%

0.0%

31/10/2014

12,139.22

1.1%

2.9%

0.0%

2.9%

0.0%

28/11/2014

12,428.98

2.4%

2.9%

0.0%

2.9%

0.1%

29/12/2014

12,356.12

-0.6%

2.9%

0.1%

D EP

0.1%

1.7%

σ

4.2%

(xi-x̄)2

0.9% σ

3.1%


PSEi-invested PHP 10,000 Portfolio Year

Value

(xi-x̄)2

x̄

Return xi

30/1/2014

10,000.00

28/2/2014

10,635.31

6.4%

1.7%

0.2%

31/3/2014

10,641.46

0.1%

1.7%

0.0%

30/4/2014

11,103.62

4.3%

1.7%

0.1%

30/5/2014

11,003.88

-0.9%

1.7%

0.1%

30/6/2014

11,329.41

3.0%

1.7%

0.0%

31/7/2014

11,363.36

0.3%

1.7%

0.0%

29/8/2014

11,671.36

2.7%

1.7%

0.0%

30/9/2014

12,055.69

3.3%

1.7%

0.0%

31/10/2014

11,944.22

-0.9%

1.7%

0.1%

28/11/2014

12,074.41

1.1%

1.7%

0.0%

29/12/2014

11,968.78

-0.9%

1.7%

0.1%

D EP

ED

C O

PY

σ

2.4%

0.6%

• Show that the standard deviation computed for a portfolio goes down as the component stocks increase in number. Notice that the PSEi has the least volatility because it is composed of 30 stocks.

ENRICHMENT (10 MINS) 1. Describe investment risk through this video (https://www.youtube.com/watch?v=3qv7E2yIiw4). 2. Emphasize that volatility can also be an opportunity. 310


3. Explain the value of properly understanding the risk of the product they are investing in.

EVALUATION (30 MINS)

Sample Quiz

The list can be modified depending on the preference of the teacher. Historical stock prices can be found on www.pse.com.ph.

JGS Year

Stock Price


Year

524.00

30/1/2014

28/2/2014

575.50

28/2/2014

31/3/2014

578.00

30/4/2014

624.00

30/5/2014

618.00

30/6/2014

647.50

31/7/2014

658.00

29/8/2014

700.50

30/9/2014

740.00

31/10/2014

690.00

28/11/2014

Stock Price

Return xi

x̄ (xi-x̄)2

39.400

46.900

ED

30/1/2014

Solutions are given in a separate spreadsheet included in this pack.

C O

AC

Teacher Tips:

PY

Quiz: Compute the standard deviation of the following stocks and the PSEi. (EASY) For xi and x̄ (AVERAGE) for (xi-x̄)2 (DIFFICULT) for σ

49.500

30/4/2014

50.600

30/5/2014

49.300

30/6/2014

51.250

31/7/2014

53.000

29/8/2014

51.450

30/9/2014

57.900

31/10/2014

63.800

694.00

28/11/2014

61.650

29/12/2014

694.00

29/12/2014

66.000

σ

σ

D EP

31/3/2014

311


AGI

SM Year

Stock Price


Year

Stock Price

Return xi

x̄ (xi-x̄)2

27.100

30/1/2014

704.500

28/2/2014

30.000

28/2/2014

694.000

31/3/2014

28.500

31/3/2014

705.000

30/4/2014

31.150

30/4/2014

725.000

30/5/2014

29.650

30/5/2014

786.000

30/6/2014

29.100

30/6/2014

816.000

31/7/2014

26.350

31/7/2014

29/8/2014

24.600

29/8/2014

30/9/2014

26.000

30/9/2014

31/10/2014

25.300

28/11/2014

24.800

29/12/2014

22.550

σ

C O

772.000

803.500

31/10/2014

783.500

28/11/2014

804.500

29/12/2014

815.000

ED

797.000

D EP

PY

30/1/2014

σ


PSEi

6,041.19

28/2/2014

6,424.99

31/3/2014

6,428.71

30/4/2014

6,707.91

30/5/2014

6,647.65

30/6/2014

6,844.31

31/7/2014

6,864.82

29/8/2014

7,050.89

30/9/2014

7,283.07

31/10/2014

7,215.73

28/11/2014

7,294.38

29/12/2014

7,230.57

σ

D EP

30/1/2014

PY


C O

Stock Price

ED

Year


Business Finance

120MINS


• •

Identify money management philosophy Apply basic personal finance principles and practices in earning, spending, saving, and investing money

ED

Learning Competencies The learners shall be able to enumerate money management philosophies. (ABM_BF12-IVo-p-26)

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Specific Learning Outcomes At the end of the unit lesson, the learners will be able to: • • •

Introduction Identify essential questions and

10

Motivation

10

communicate learning competencies and objectives.

C O


LESSON OUTLINE

PY

Content Standards The learners demonstrate an understanding of the philosophy and practices in personal finance.

Define personal finance Enumerate and define the personal financial planning process Describe the six key areas of personal financial planning

Present how famous personalities became bankrupt because of overspending.

Instruction/ Give a lecture on personal finance, the Delivery

60

Enrichment Share the four simple habits for personal

10

personal financial planning process, and its six key areas. finance success.


Quiz • LCD Projector • Laptop with Microsoft Office Powerpoint OR • Overhead Projector • Acetates

Resources (1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex Bookstore. (2) Finance websites


30

INTRODUCTION (10 MINS)

Teacher Tip

1. Identify the essential questions:

On the essential questions, try to get as much insights from the learners as possible.

Ask the learners how much they spend every day. Ask them also what do they spend it for. How much is their daily allowance from parents? Make them compute: daily allowance from parents less daily expenses • Are they able to save from their allowance? • If yes, what do they do with their savings? Which investments can they put their savings into? • If no, how do they address the deficit? Do they ask from their parents? Is this a good practice?

C O

PY

• • •

2. Transition by saying that these questions will be answered by meeting the following objectives throughout the discussion. 3. Communicate learning competencies and objectives

D EP

•

Enumerate the learning competencies. • Enumerate money management philosophies. Enumerate the specific learning outcomes. • Define personal finance • Enumerate and define the personal financial planning process. • Describe the six key areas of personal financial planning.

ED

•


1. Share the story of top celebrities who went broke through a video: Top 10 Celebrities Who Went Broke. (2015). YouTube. Retrieved 8 May 2016, from https://www.youtube.com/watch? v=eh3TgZ_V_S8 2. Emphasize to the learners that these people have successfully reached career peaks accompanied 315 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Teacher Tip Let the learners appreciate that even some of the biggest and richest celebrities can still go bankrupt if they have poor money management practices. If you can’t access the video, refer to the list below:

by huge fortune. However, because of poor personal financial planning, they still went broke due to overspending practices and lack of appropriate investments. 3. Ask them if they want to be like these celebrities.

ED

C O

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4. Encourage them to appreciate the value of financial planning as early as now so they are able to internalize it and make it part of their system so that, when it’s their turn to reach fame and fortune, they will know how to manage their finances well and not go broke.

1. Toni Braxton – earned approximately USD170 million. He was a shopaholic, diagnosed with Angina and Lupus, and filed for bankruptcy twice. 2. Nicolas Cage – one of the highest paid actors in Hollywood, made bizarre purchases such as castles, islands, and dinosaur skulls. He ended up with a USD14 million debt to the Internal Revenue Service (IRS). 3. Mike Tyson – earned approximately USD300 million over his entire boxing career but got into a divorce and various addictions, squandered his money on homes, cars, parties, and tigers, and filed for bankruptcy in 2003.

INSTRUCTION/DELIVERY (60 MINS) 1. Personal Finance.

D EP

• Define Personal Finance. (Source: Investopedia - Sharper Insight. Smarter Investing. | Investopedia. (2016). Investopedia. Retrieved 8 May 2016, from http://investopedia.com) • Personal finance includes all financial decisions and activities of an individual including budgeting, insurance, mortgage planning, savings, and retirement planning. • It involves analyzing current financial positions, projecting short-term and long-term funding needs, and executing a plan to fulfil those needs considering individual financial constraints. • It is primarily dependent on one’s earnings, cost of living, and personal goals and wants. • Encourage participation through posing the following questions to the learners: • Who of them has done or does personal budgeting? How did/do they do it? • What are their personal goals and wants at their age? Do they have the financial capacity to fulfil them? 316 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

If the learners are successfully motivated, they will be more curious about what personal finance is.

2. Personal financial planning process.

ED

C O

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• Show the chart below. (Source: Private Financial Design. (2016). Privatefinancialdesign.com. Retrieved 8 May 2016, from http://privatefinancialdesign.com)

• Explain each step of the personal financial planning process. (Source: Private Financial Design. (2016). Privatefinancialdesign.com. Retrieved 8 May 2016, from http://privatefinancialdesign.com)

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A. Objective Setting • Quantify monetary objectives with definite time frames. • Prioritize objectives. • Examine these objectives with an individual’s resources and limitations.

B. Data gathering • Use surveys, questionnaires, and interviews to gather quantitative and qualitative information from the individual. • Quantitative – for assessing financial status (i.e. investments, cash flow, liabilities, etc.) • Qualitative – to identify individual’s goals and objectives, lifestyle, risk-tolerance, etc. C. Data Analysis • Analyze the individual’s financial position and cash flows. 317 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Teacher Tips: Examples: • Objective Setting – A mom wants to have PHP1 million after 10 years for her daughter’s education. • Data Gathering – Interview the mom to know how much savings she has and her current sources of income. • Data Analysis – Map the mom’s net cash flows and compute her required return to reach her target of PHP1 million after 10 years. • Financial Plan Recommendation – Identify stocks, mutual funds or other assets which can generate the mom’s required return. • Plan Implementation – Help the mom open an account so she can invest in the recommended financial plan. • Plan Monitoring – Check regularly whether the fund is growing as planned. Consider other alternative assets if performance is not good.

• Review legal papers (i.e. insurance policies, trust agreements, wills, etc.). • Evaluate objectives vis-à-vis the individual’s resources and economic conditions. D. Financial Plan Recommendation • Propose financial products. • At this point, the individual can comment on the proposed solutions.

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E. Plan Implementation • Assist the individual in the execution of the recommended financial plan. • Implementation may involve other entities so assist the individual in dealing with the parties involved in the execution of the financial plan.

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F. Plan Monitoring • Review the financial plan periodically to evaluate changing market conditions (i.e. economic conditions, taxes, interest rates, etc.). • Evaluate the financial plan regularly to see if it effectively meets the individual’s goals and objectives. 3. Six Key Areas of Personal Financial Planning.

(b) Adequate Protection

(c) Tax Planning

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(a) Financial Position

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• Show chart below (Source: World’s Largest Professional Network | LinkedIn. (2016). Linkedin.com. Retrieved 8 May 2016, from https:// www.linkedin.com/)

(d) Investment and Accumulation Goals

(e) Retirement Planning

(f) Estate Planning

• Explain each key area of personal financial planning (Source: AdvisorNet Financial — Index. (2016). Advisornet.com. Retrieved 8 May 2016, from http://www.advisornet.com/; World’s Largest Professional Network | LinkedIn. (2016). Linkedin.com. Retrieved 8 May 2016, from https:// www.linkedin.com/) A. Financial Position 318 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

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Adequate Protection Analysis of protection needed for unforeseen risks. Includes risks of liability, property, death, disability, health, and long-term care. Some insurance plans enjoy some tax benefits. May need to answer the following questions: • What things can they not afford to lose? • How will they take care of their dependents? • How have they planned for financial risks such as disability, illness, long-term care, and death?

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B. • • • •

Understanding of personal resources by checking an individual’s net worth and cash flow. Net worth = assets less liabilities at a point in time Cash flow = expected sources of income less expected expenses within a period (i.e. year) Helps in determining the time frame to which personal goals can realistically be met. May need to answer the following questions: Do they have a clear understanding of their goals? • How do they track their income, expenses, and net worth? • What financial benefits do they get from their employer?

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• • • • • •

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C. Tax Planning • Management of when and how much taxes will be paid. • Understanding possible tax incentives, deductions, rebates, etc. can have a significant impact on managing personal finances given the magnitude of taxes paid by an individual. • May need to answer the following questions: • How do they manage their taxes? • How do they plan the timing of income and deductions for tax purposes? • Are they comfortable with the tax environment applicable to them? D. Investment and Accumulation Goals • Planning on wealth accumulation for large purchases such as house, educational expenses, investments for retirement, etc. • May need to answer the following questions: • What are their goals for wealth accumulation? (i.e. education, home, business, retirement comfort, etc.) • How are their current investments performing to meet their goals? • How much will they need? When will they need it? 319 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

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E. Retirement Planning • Understanding the cost of retirement. • Analysis of cash flows to come up with investment plans that will meet the costs of retirement in the future. • May need to answer the following questions: • How are they preparing for their retirement? • How are their liabilities affecting their retirement objectives? • Do they think they can maintain their standard of living during their retirement?


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F. Estate Planning • Planning for disposition of one’s assets after death. • Estate taxes paid to the government are huge, so avoiding these taxes can significantly impact one’s personal finances. • May need to answer the following questions: • How should their assets be distributed upon death? • How will their intentions be carried out? (i.e. will, trust, power of attorney, etc.)

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A. Share the four simple habits for personal finance success through this video: “Four Simple Habits for Personal Finance Success” (Patzer, A. (2009). Four Simple Habits for Personal Finance Success -Mint Featured on ABC News Money Matters. YouTube. Retrieved 8 May 2016, from https:// www.youtube.com/watch?v=R0TznyjIZxA) B. Emphasize to the learners that at their age, they should start internalizing these habits to imbibe in them the good practices of personal finance. This will greatly help them avoid going broke. C. Ask the learners to enumerate the four simple habits for personal finance success. D. Encourage them to make these their habits as well.


Teacher Tips: If you can’t access the video, refer to the list below: 1. Save money – spend less than what they earn. 2. Avoid debt – manage their credit and debt wisely. 3. Invest – invest what they save. 4. Don’t lose it – protect their downside by diversification or insurance.

EVALUATION (30 MINUTES) Answer Key:

QUIZ

Part 1: C, E, A, B, D Part 2: D, B, E, C, A

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1. (EASY) Match the step in the personal financial planning process in column A with its description in column B by writing the capital letter on the left side of column A (Source: Private Financial Design. (2016). Privatefinancialdesign.com. Retrieved 8 May 2016, from http://privatefinancialdesign.com.) (A) Personal Financial Planning Process Step

(B) Description

Data Gathering

A. Periodic review of the financial plan to evaluate changing market conditions (i.e. economic conditions, taxes, interest rates, etc.).

___2

Financial Plan Recommendation

B. Quantifying monetary objectives with definite time frames. Prioritizing objectives.

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Plan Monitoring

C. Using surveys, questionnaires and interviews to gather quantitative and qualitative information from the individual.

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Objective Setting

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Data Analysis

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D. Analysis of the individual’s financial position and cash flows. Review of legal papers. Evaluation of objectives vis-à-vis the client’s resources and economic conditions. E. Financial products will be proposed. At this point, the individual can comment on the solutions proposed.


2. (AVERAGE) Match the key area of personal financial planning in column A with its description in column B by writing the capital letter on the left side of column A (Source: World’s Largest Professional Network | LinkedIn. (2016). Linkedin.com. Retrieved 8 May 2016, from https:// www.linkedin.com/). (A) Key Area of Personal Financial Planning

(B) Description

Financial Position

A. Planning on wealth accumulation for large purchases such as house, educational expenses, investments for retirement, etc.

___2

Tax Planning

B. Management of when and how much taxes will be paid.

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Retirement Planning

C. Analysis of protection needed for unforeseen risks.

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Adequate Protection

D. Understanding of personal resources by checking an individual’s net worth and cash flow.

___5

Investment and Accumulation Goals

E. Understanding the cost of retirement. Analysis of cash flows to come up with investment plans that will meet the costs of retirement in the future.

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3. Essay: (DIFFICULT) Assume you are 18 years old and you were able to save PHP50,000. Given what you’ve learned on portfolio diversification, how will you allocate your savings to bank time deposit and stocks (i.e. 100%-0%, 50%-50%, etc.)? Explain your answer.


Biographical Notes JERELLEEN A. RODRIGUEZ Writer

Dr. Arthur Cayanan is presently a Professor at the Virata School of Business, University of the Philippines - Diliman. He is also designed as an Investment Officer under the UP Business Research Foundation, Inc. He received his doctorate degree in Business Administration and master’s degree in Economics at UP Diliman, in addition to completing his bachelor’s degree (cum laude) in BS Business Administration and Accountancy. He also garnered 7th place in the licensure examination for Certified Public Accountants. He has been teaching Accounting for NonAccountants, Capital Budgeting, and Financial Statement Analysis for many years.

Ms. Rodriguez is an Instructor IV at the Virata School of Business in the University of the Philippines - Diliman, teaching Public Accounting Practice and Advanced Accounting. She graduated cum laude with a degree in Bachelor of Science in Business Administration and Accountancy from UP Diliman and is an awardee of the Ester Tanco Scholarship. Ms. Rodriguez garnered 6th place in the October 2013 CPA Licensure Examination given by the Professional Regulation Commission. Prior to her teaching position, she was a Tax Associate for Sycip, Gorres, Velayo, and Co, primarily responsible for handling tax engagements involving various industries as part of the Global Compliance and Reporting group of the largest auditing firm.

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ARTHUR S. CAYANAN, PH.D Team Leader

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Dr. Cayanan has provided lectures to multiple institutions in the Philippines. He is a lecturer, course developer, and program designer for both public and private companies around the country such as the Security and Exchange Commission (SEC), L’oreal Philippines, Inc., Nestle Philippine, San Miguel Corporation, Petron Corporation, and Bank of the Philippine Islands, to name a few. Furthermore, he has accomplished various research works and projects such as The Impact of Deregulation on the Financial Performance of PLDT (2012), Pricing in Regulated Industries: The Telecommunications Sector, 2012-13 (with Dr. Ivy Suan), and Analysis and Review of Financial Statements of Public Corporations, Securities and Exchange Commission (July 2002 – 2009).

ARTHUR P. BARRIDO, JR. Writer Prof. Arthur Barrido works as a professor of Accounting and Finance at the College of Management in the University of the Philippines Visayas. His areas of expertise include Financial Accounting/Management Accounting, and Financial Management/Investment Management. Prof. Barrido graduated from UP Visayas with a Bachelor of Science in Business Administration major in Accounting and Master of Management Business Management. In addition, he became a Certificate Public Accountant in 1988. He has been an integral member of UP Visayas as a Faculty since 1993, Investment Officer since 2001, and Chairperson (Department of Accounting) since 2009.


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RACHELLEEN RODRIGUEZ Writer

Mr. Diogenes Dy currently teaches Accounting and Finance courses at the Virata School of Business in the University of the Philippines - Diliman. Aside from the instructor role, he is also the designated coach of the UP Diliman team for the Chartered Financial Analyst Institute (CFA) Global Investment Research Challenge competition. Mr. Dy graduated Magna Cum Laude in BS Business Administration and Accountancy at UP Diliman. After graduation, he passed the Board Licensure Examination for Certified Public Accountants on October 2011. Prior to his current work, he was a Financial Analyst for Philex Mining Corporation and Analyst for Credit Suisse.

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Mr. Al-Habbyel Yusoph is an instructor for Financial Accounting and Business Feasibility courses at the Virata School of Business in the University of the Philippines - Diliman. Aside from his position as an instructor, he is presently a part-time associate for Future Value Consulting and a Business Analyst for Mitchell Madison Group Management Consulting. He graduated Magna Cum Laude in BS Business Administration and Accountancy in UP Diliman. In addition, he also ranked 12th in the Board Licensure Examination for Certified Public Accountants (October 2014) and Champion in the 15th FINEX-JP Morgan Chase Inter-Collegiate Finance Competition.

DIOGENES C. DY Writer

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AL-HABBYEL YUSOPH Writer

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Ms. Racheleen Rodriguez is a part-time instructor in teaching Fundamentals of Derivative Securities in the University of the Philippines Diliman. She is also a full-time Supervision and Examination Specialist II for Bangko Sentral of the Philippines. Ms. Rodriguez graduated Cum Laude in BS Business Administration and Accountancy from UP Diliman. In addition, she was a consistent university and college scholar, being an awardee of Posco Asia Foundation Scholarship which grants tuition privileges. Her other achievements include having passed the RA 1080 Philippine CPA Boards, awarded the Certified Internal Auditor (CIA) designation, and passed the CFA Level 1 examination.

PAMELA LLOREN Technical Editor

Ms. Pamela Lloren is a lecturer handling Auditing and Accounting subjects in the undergraduate level of the UP Cesar E.A. Virata School of Business at the University of the Philippines - Diliman. She is also Treasurer for Gandang Kalikasan, Inc., a social enterprise that promotes the Human Nature product line, a personal care brand that is pro-Philippines, pro-poor, and proenvironment. Ms. Lloren graduated Cum Laude in BS Business Administration and Accountancy at UP Diliman. She then passed the Board Licensure Examination for Certified Public Accountants on October 2005.


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Ms. Andrea Balce currently works as an Instructor VII under the Cesar E.A. Virata School of Business Finance at the University of the Philippines - Diliman. She also works an Associate Director for FTI Consulting Administrative Services, Inc. Ms. Balce graduated Magna Cum Laude from UP Diliman with a degree in BS Business Administration and Accountancy. She is also awarded a Gold Medal for Excellence in Finance, awarded by the Institute of the Philippines, and a University Scholarship by the Bank of Tokyo-Mitsubishi. Apart from her academic achievements, she has attended multiple training workshops and seminars regarding Merger Modeling, Financial Modeling, Advanced Microsoft Excel, and Microsoft Access.

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MA. ANDREA ANTONINO-BALCE Technical Editor

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PATRICIA CARMELA I. LUMANLAN Copyreader

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Ms. Patricia Lumanlan primarily works as a copywriter for Campaigns & Grey Inc., handling multiple clients such as Sun Cellular, Rockwell Land, Universal Robina Corporation, and Lamoiyan in planning, developing, and executing various marketing and advertising campaigns. Through her primary occupation, she has garnered an Award for Excellence and an Award for Merit presented at the Philippine Quill Awards 2014 for exemplary and notable work under Sun Cellular’s Project Evolver. Moreover, she has been a freelance for almost ten years, acting as art director, graphic designer, and copywriter in developing creative materials for various independent clients. Ms. Lumanlan graduated with a degree in Bachelor of Fine Arts, Major in Information Design and Minor in Japanese Studies, at the Ateneo de Manila University.


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