Southern City Colleges

Pilar Street, Zamboanga City

REFERENCE MODULES
IN
FINANCIAL MANAGEMENT

PREPARED BY:

MICHAEL B. GARAN
SUBJECT INSTRUCTOR
 MODULE 2-FINANCIAL PLANNING PROCESS

WHAT THIS MODULE ALL ABOUT?

Financial Planning is 90% process and 10% content. The most important interactions
with clients occur while learning about their goals and values, not while discussing
their insurance coverage or retirement plans. This module will teach the student to
identify the six steps in the financial planning process, the use of systematic
procedures to acquire and process client information, distinguishing between
qualitative and quantitative data, and discussing the importance of assumptions in
financial planning.
Topics included in this module are:
 Personal Financial Planning Process
 Behavioral Finance
 Financial Counseling
 Cash Flow Planning – Reasons for Saving
 Formal and Informal Budgeting
 Meeting Client’s needs
 Reconstructing Client’s Personal Financial Statement
 Analyzing the Client’s Situation
 Preparing the Financial Plan

This module will treat the household as the proper organizational structure for an
individual’s financial activities. The student will look at the economic theories that
have led to the household financial approach and learn about the cost of time and
how household outlays can be separated into two parts: maintenance and leisure.
The discussion in this session will focus on the household as an enterprise with
similarities to a business, using household finance as an approach to link to
personal financial planning.

The central purpose of investment planning varies throughout a client’s life. At one
point, the goal may be to accumulate wealth, at another to conserve wealth, and at
another to produce income. A financial planner’s role is to develop, implement and
monitor a long-term investment strategy to help client’s achieve their objectives. This
module will describe how a client’s unique situation may influence investment
strategy, identify five common investment objectives and explain step-by-step
process for developing an investment strategy.

WHAT DO YOU EXPECT TO LEARN?

COMMON SUBJECT DESCRIPTION:

The main elements of a financial plan include a retirement strategy, a risk
management plan, a long-term investment plan, a tax reduction strategy, and an
estate plan.
 WEEK 1

INTENDED LEARNING OUTCOMES

After this this lesson, you should be able to:

1. Financial Management Learning Outcomes.
2. Collect the quantitative and qualitative information required to develop
a financial plan.
3. Analyze potential opportunities and constraints and assess information to
develop strategies.
4. Synthesize information to develop and evaluate strategies to create
a financial plan.

PERFORMANCE STANDARDS
The learner is able to;
 Processes financial documents and data in an efficient and timely manner. Analyzes
data and prepares ... Coordinates the annual budget planning and preparation process. 
 LESSON 1:
ILLUSTRATION OF FORMULA AND FORMAT FOR THE
PREPARATION OF BUDGETS AND PROJECTED FINANCIAL
CC BY
STATEMENT. Author is licensed under
This Photo by Unknown
PRE-TEST
Answer the questions below. Follow instructions properly.
I-TRUE or FALSE
Direction: Write TRUE after the item when the sentence is true while
FALSE if the statement is false and give the correct answer.
1.  There 5 Steps in Financial planning success?. (T)_______________
2.  . There are 7 components of financial plan? (T) _______________
3. Financial planning process has 7 steps? (F) _______________
4. Developing financial goals.is part of Financial process steps?(T) _________________

5. Tactical Planning is part of types of financial plan? (T) ___________________

6. Strategic plans are all about why things need to happen? (T)____________________

7.. Operational plans are about how things need to happen (T)_____________________

 8.  A good financial plan contains Budgeting and taxes. (T)_______________
9. Evaluating alternatives is part of financial planning
process(T)____________________

10.The financial planning process reevaluating and revising the plan (T)

________________
 WHAT IS FINANCE

This Photo by
Finance is a term for Author
Unknown matters
is regarding the management, creation, and
study of money and investments.
licensed under Specifically, it deals with the questions of how
and why an individual, company or government acquires the money needed –
CC BY-SA-NC
called capital in the company context – and how they spend or invest that money.
Finance is a broad term that describes activities associated with banking,
leverage or debt, credit, capital markets, money, and investments.
Basically, finance represents money management and the process of acquiring
needed funds.

WHAT IS FINANCIAL MANAGEMENT?

Financial management may be defined as the area or function in an
organization which is concerned with profitability, expenses, cash and credit, so
that the "organization may have the means to carry

What is financial management and example?

Financial management is defined as dealing with and analyzing money and
investments for a person or a business to help make business decisions.
An example of financial management is the work done by an accounting
department for a company.

Financial Planning is the process of evaluating and managing the utilization

of financial resources optimally for the achievement of an organization's goals
and objectives. Financial planning helps insulating businesses from myopic
policies and practices, and aids in mapping out its financial future.

What are the six steps in the financial planning process?

Terms in this set (6)
1. step 1: determine your current financial situation.
2. step 2: your financial develop goals. ...
3. step 3: Identify Alternative Courses of Action. ...
4. step 4: evaluate your alternatives. ...
5. step 5: create and use your financial plan of action. ...
6. step 6: review and revise plan.

How do I determine my current financial situation?

5 Simple Steps To Evaluate Your Financial Health
1. Determine your net worth, and see which way it's trending.
2. Calculate your debt-to-income ratio (and try not to scream)
3. Evaluate your housing situation.
4. Find out where your money is going (and if you're spending more than you
should)
5. Make sure your investment strategy is aligned with your situation.

How do I find my course of action?

Possible courses of action are typically developed using the following steps:
1. Depict the scenario. Create a potential scenario based on the threats and
hazards identified and prioritized in Step 2.
2. Determine the amount of time available to respond. ...
3. Identify decision points. ...
4. Develop courses of action.

What does it mean to evaluate alternatives?

Evaluation of alternatives is the third stage in the Consumer Buying Decision
process. During this stage, consumers evaluate all of their product and brand
options on a scale of attributes which have the ability to deliver the benefit that
the customer is seeking.

What are the steps in financial planning?

5 steps to financial planning success
1. Step 1 - Defining and agreeing your financial objectives and goals. ...
2. Step 2 – Gathering your financial and personal information. ...
3. Step 3 – Analyzing your financial and personal information. ...
4. Step 4 – Development and presentation of the financial plan. ...
5. Step 5 – Implementation and review of the financial plan.

How to Make Budgets [Complete Steps with Examples ...

accounting-financial-tax.com › 2010/08 › how-to-make-budgets-com...

Aug 6, 2010 - Cash Budget; Pro Forma (Budgeted) Balance Sheet ... The example will

highlight the variable cost–fixed cost breakdown throughout. ... Projection”) is the starting
point in preparing the operating budget, since estimated sales volume influences almost ...
The formula for computing the “Purchase” is as follow:.
BUDGETING

How to Make Budgets

Budget, in short is a company’s annual financial plan. In long word, it is a
set of formal (written) statements of management’s expectations regarding
sales, expenses, production volume, and various financial transactions of
the firm for the coming period. Budget is consists of pro forma statements
about the company’s finances and operations. What steps needed to make
a budget?
It is the company’s tool for both planning and control. At the beginning of the
period, the budget is a plan or standard; and at the end of the period, it serves as
a control device to help management measure the firm’s performance against the
plan so that future performance may be improved.

Through case examples, this post provides a sequenced step-by-step

guide to set up a budget, since the sales stage until the cash budget,
budgeted income statement and budgeted balance sheet. The discussion is
started from the general structure of the budget. It’s a long-long page. For
faster page-load, I splitted them into 11 (eleven) pages (each page contains
one step – one type of budget.) 

General Structure Of a Complete Set of Budget

A complete set of budget is classified broadly into two categories which are inter-
related one to the other:

1. Operational Budget – It reflects the results of operating decisions, consists of

eight elements follows:

 Sales Budget (including a computation of “expected cash collection”)

 Production Budget
 Ending Inventory Budget
 Direct Materials Budget (including a computation of “expected cash
disbursements/payment for materials)
 Direct Labor Budget
 Factory Overhead Budget
 Selling and Administrative Expense Budget
 Pro Forma (or Budgeted) Income Statement

 2. Financial budget – It reflects the financial decisions of the firm, consists two
of:
 Cash Budget
 Pro Forma (Budgeted) Balance Sheet

The major steps in preparing the budget are:

Step-1. Prepare a sales forecast (Sales Budget)

Step-2. Determine production volume (Production Budget)
Step-3. Estimate manufacturing costs and operating expenses (Direct Material,
Direct Labor and Factory Overhead Budget)
Step-4. Determine cash flow and other financial effects (The Cash Budget)
Step-5. Formulate projected financial statements (Budgeted Income Statement
and Balance Sheet)
 TOOLS IN MANAGING CASH RECEIVABLES AND INVENTORY

IN MANAGING FINANCIAL GROWTH OF COMPANY, CASH, RECEIVABLES AND

INVENTORY JOINTLY FORM WORKING CAPITAL OF A FIRM. IT IS IMPERATIVE
FOR EXPERTS TO KEEP GOOD BALANCE OF THESE FACTORS.
...
THAT INCLUDE:
 CURRENT RATIO. THIS IS CURRENT ASSETS DIVIDED BY CURRENT
LIABILITIES.
 QUICK RATIO. ...
 Cash ratio.

There are two ways to calculate the quick ratio: QR = (Current Assets – Inventories –
Prepaid) / Current Liabilities. QR = (Cash + Cash Equivalents + Marketable Securities +
Accounts Receivable) / Current Liabilities.

What is the cash coverage ratio formula?

The cash coverage ratio formula is: Cash Ratio =

(Cash + Cash Equivalents) / Total Current Liabilities. Typically, you may
combine cash and equivalents on your balance sheet or list them separately.
 DAGDAG-BAWAS CORPORATION
Comparative Statement of Financial Positions

Increase/Decrease %Inc/Dec
Year 3 Year 2 Year 1 Yr 3 Yr 1 Yr 3 Yr 1
-Yr 2 -Yr2 -Yr 2 -Yr2
Assets
Current Assets
Cash 360 180 140 180 40 100% 29%
Cash 80 120 100 -40 20 -33% 20%
Equivalents
Accounts 60 90 80 -30 10 -33% 13%
Receivables
Inventory 40 50 90 -10 -40 -20% -44%
Total 540 440 410 100 30 23% 7%
Current
Assets
Property, 70 75 80 -5 -5 -7% -6%
Plant, and
Equipment
Total 610 515 490 95 25 18% 5%
Assets
Liabilities
Current 120 90 120 30 -30 33% -25%
Liabilities
Long-term 120 140 160 -20 -20 -14% -13%
Debt
Total 240 230 280 10 -50 4% -18%
Liabilities
Owner’s 370 285 210 85 75 30% 36%
Equity
Total 610 515 490 95 25 18% 5%
Liabilities
and
Owner’s
Equity
 DAGDAG- BAWAS CORPORATION
Comparative Statement of Comprehensive Income

Year 3 % Year 2 % Year 1 %

Net Sales 480 100% 385 100% 360 100%

Less: Cost of Sales 264 55% 212 55% 216 60%

Gross Profit 216 45% 173 45% 144 40%

Less: Operating Expenses

Selling 24 5% 19 5% 15 4%

General 37 8% 18 5% 20 6%

Income from Operations 155 32% 136 35% 109 30%

Interest Expense 28 6% 24 6% 25 7%

Depreciation Expense 5 1% 1 5% 5 1%

Income before Taxes 122 25% 107 28% 79 22%

Income Tax(30%) 37 8% 32 8% 24 7%

Net Income 85 18% 75 19% 55 15%

Assumption: tax rates is based on corporate tax of 30%

1.) What is the Net Working Capital Ratio?
2.) What is the Current Ratio?
3.) What is Quick Ratio or Acid test Ratio
4.) What is Accounts Receivable Turn over Ratio
5.) What is the Inventory Ratio
6.) What is total Asset Turn over Ratio
7.) What is debt Ratio
8.) What is Debt equity Ration
9.) What is Time Interest Earned Ratio
 10.) What is the Gross Profit Margin Ratio
 1. Net Working Capital:
Net working=Current Assets-Current Liabilitites

2. Current Ratio:
Current Assets
Current Liabilities
3. Quick Ratio or Acid test Ratio:

Current Assets-Inventory
Current Liabilities
4. Account Receivables Turnover Ratio

Account Recievable Turnover= Net Sales

Average Accounts Receivable
5. Inventory Ratios

Inventory Turnover = Cost of Goods Sold

Average Inventory
6. The Operating Cycle
Operating Cycle= Average Collection Period + Average Age of Inventory
7. Total Asset Turnover Ratio

Total Asset Turnover = Net Sales

Average Total Assets
8. The Dept Ratio

Dept Ratio = Total Liabilities

Total Assets

9. The Dept-Equity Ratio

Dept-Equity Ratio = Total Liabilities

Owner’s Equity
10. Times Interest Earned Ratio

Times Interest Earned Ratio= Income before Interest and Taxes

Interest Expense
EXERCISES:
 CHOOSE THE CORRECT ANSWER THAT IS APPROPRIATE TO THE STATEMENT.
1. Another name for the balance sheet is
A. Statement Of Operations B. Statement Of Financial Position

2. The balance sheet heading will specify a

A. Period of Time B. Point In Time
 
3. Which of the following is a category or element of the balance sheet?
A. Expenses B. Gains C. Liabilities D. Losses

4. Which of the following is an asset account?

A. Accounts Payable B. Prepaid Insurance C. Unearned Revenue

5. Which of the following is a contra account?

A. Accumulated Depreciation B. Mary Smith, Capital
 
6. What is the normal balance for an asset account?
A. Debit B. Credit

7. What is the normal balance for liability accounts?

A. Debit B. Credit
 
8. What is the normal balance for stockholders' equity and owner's equity accounts?
A. Debit B. Credit
 
9. What is the normal balance for contra asset accounts?
Debit B. Credit
10. Which of the following would not be a current asset?

A. Accounts Receivable B. Land C. Prepaid Insurance D. Supplies

FINANCIAL POSITION OF PROFIT & LOSS/ INCOME STATEMENT

Also known as the profit and loss statement or the statement of revenue and

expense, the income statement primarily focuses on the company's revenues and
expenses during a particular period.

An income statement or profit and loss account is one of the financial statements of a
company and shows the company's revenues and expenses during a particular period. It
indicates how the revenues are transformed into the net income or net profit.

WHAT TYPES OF ACCOUNTS APPEAR ON THE INCOME STATEMENT?

The income statement accounts most commonly used are as follows:

 Revenue. Contains revenue from the sale of products and services. ...
 Sales discounts. ...
 Cost of goods sold. ...
 Compensation expense. ...
 Depreciation and amortization expense. ...
 Employee benefits. ...
 Insurance expense. ...
 Marketing expenses.

WHAT IS NOMINAL ACCOUNTS?

The entire purpose of a nominal account is to track the revenue and expenses
for a company so that the net profit or net loss for a specific period can be
calculated. Examples of nominal accounts are service revenue, sales revenue,
wages expense, utilities expense, supplies expense, and interest expense.
A Nominal account is a General ledger account pertaining to all income, expenses,
losses and gains. An example of a Nominal Account is an Interest Account.

Nominal accounts summarize a business's revenue and expenses over a

period of time, such as a year.

EXAMPLES OF NOMINAL ACCOUNTS:

Purchase account is Nominal account. Nominal account is the account of expenses and

loss and income and gain. purchase is an expense for any firm or
organization. purchases and sales both are Nominal Accounts only.

ACTIVITY:

Given Data : XYZ Corporation for period January 1, 2006 to December 31, 200
Beginning Inventory 750,000
General and Admin. Exp. 240,000
Purchases 3,000,000
Ending Inventory 850,000
Selling Expenses 900,000
Tax Rate(%/100) 0.45
Purchases 3,000,000
Sales returns 200,000
Sales 8,000,000

FROM THE ABOVE INFORMATION COME UP A

1. CORRECT INCOME STATEMENT PRESENATION
WHAT IS LIQUIDITY?
 Liquidity refers to the ease with which an asset, or security, can be converted into ready
cash without affecting its market price.

 Liquidity means how quickly you can get your hands on your cash. In simpler
terms, liquidity is to get your money whenever you need it. Cash, savings account,
checkable account are liquid assets because they can be easily converted into cash as
and when required.

What does liquidity mean in business?

Liquidity refers to the ease with which an asset, or security, can be converted

into ready cash without affecting its market price. Cash is the most liquid of
assets while tangible items are less liquid and the two main types
of liquidity include market liquidity and accounting liquidity.

WHAT IS SOLVENCY?
 Solvency is the ability of a company to meet its long-term debts and other financial
obligations. Solvency is one measure of a company's financial health, since it demonstrates
a company's ability to manage operations into the foreseeable future.

Solvency is the ability of a company to meet its long-term debts and other financial
obligations. Solvency is one measure of a company's financial health, since it
demonstrates a company's ability to manage operations into the foreseeable future.
Investors can use ratios to analyze a company's solvency.

Why is Solvency important?

Along with liquidity and viability, solvency enables businesses to continue operating.
This is important because every business has problems with cash flow occasionally,
especially when starting out. If businesses have too many bills to pay and not enough
assets to pay those bills, they will not survive.

WHAT IS STABILITY?
The quality, state, or degree of being stable: such as. a : the strength to stand or
endure : firmness. b : the property of a body that causes it when disturbed from a
condition of equilibrium or steady motion to develop forces or moments that restore the
original condition.

“Stability denotes a condition in which some aspects of a system are

unchanging, at least at the scale of observation. Stability means that a small
disturbance will fade away—that is, the system will stay in, or return to,
the stable condition. ... Stable matter is a system of atoms in dynamic
equilibrium.

What are examples of stability?

Stability is the state of being resistant to change and not prone to wild
fluctuations in emotion. An example of stability is a calm, stable life where you
don't have wild ups and downs.

WHAT IS PROFITABILITY?
 Profitability is a measurement of efficiency – and ultimately its success or failure. A
further definition of profitability is a business's ability to produce a return on an
investment based on its resources in comparison with an alternative investment.

How important is profitability?

Profit equals a company's revenues minus expenses. Earning a profit
is important to a small business because profitability impacts whether a company
can secure financing from a bank, attract investors to fund its operations and
grow its business. Companies cannot remain in business without turning a profit.

Horizontal and Vertical Analysis.

Horizontal analysis refers to changes of financial statement numbers and

ratios across.

Financial ratio:
Financial ratios are relationships determined from a company's financial information
and used for comparison purposes. ... Usually these measurements or account balances
are found on one of the company's financial statements—balance sheet, income
statement, cash flow statement, and/or statement of changes in owner's equity.
A financial ratio or accounting ratio is a relative magnitude of two selected numerical
values taken from an enterprise's financial statements. Often used in accounting, there are
many standard ratios used to try to evaluate the overall financial condition of a corporation
or other organization. 

CURRENT RATIO
The current ratio is a liquidity ratio that measures whether a firm has enough resources to
meet its short-term obligations. It compares a firm's current assets to its current liabilities,
and is expressed as follows: The current ratio is an indication of a firm's liquidity.

For example, if a company's current assets are PHP 5,000 and its current liabilities are

PHP 2,000, then its current ratio is 2.5.
FORMULA
Current ratio- is a comparison of current assets to current liabilities, calculated by
dividing your current assets by your current liabilities. ... Potential creditors use
the current ratio to measure a company's liquidity or ability to pay off short-term debts.

Gross Profit ratio - is a profitability ratio that shows the relationship between gross

profit and total net sales revenue. 
The ratio is computed by dividing the gross profit figure by net sales.

Net Profit ratio - Expressed as a percentage, the net profit margin shows how much of each
dollar collected by a company as revenue translates into profit.
Profit margin, net margin, net profit margin or net profit ratio is a measure of profitability.
It is calculated by finding the net profit as a percentage of the revenue. 
Receivable turnover - The receivables turnover ratio is an accounting measure used to
quantify a company's effectiveness in collecting its receivables or money owed by clients.
The ratio shows how well a company uses and manages the credit it extends to customers
and how quickly that short-term debt is collected or is paid.
Receivable Turnover Ratio or Debtor's Turnover Ratio is an accounting measure used to
measure how effective a company is in extending credit as well as collecting debts. The
receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets

Debt to Equity ratio - is calculated by dividing a company's total liabilities by its

shareholder equity. These numbers are available on the balance sheet of a company's
financial statements. The ratio is used to evaluate a company's financial leverage.
The debt-to-equity ratio is a financial ratio indicating the relative proportion of
shareholders' equity and debt used to finance a company's assets. Closely related to
leveraging, the ratio is also known as risk, gearing or leverage. 

Inventory turnover - ratio showing how many times a company has sold and
replaced inventory during a given period. A company can then divide the days in the
period by the inventory turnover formula to calculate the days it takes to sell
the inventory on hand.

Turnover Days in financial modeling

You can calculate the inventory turnover ratio by dividing the inventory days ratio by 365

and flipping the ratio. In this example, inventory turnover ratio = 1 / (73/365) = 5. This
means the company can sell and replace its stock of goods five times a year.

REFERENCES:
 Financial Ratios
https://www.investopedia.com/terms/d/debtequityratio.asp

Business Finance( 2019 edition) DIWA learning system Inc.

FINANCIAL MANAGEMENT
https://www.managementstudyguide.com/financial-management.htm

FINANCIAL STATEMENTS
https://www.investopedia.com/terms/f/financial-statements.asp

SUMMATIVE TEST
Answer the questions below following the instruction given in each test.
Identify what is being asked in each number. Write your answer after the
statement.
I-Identification (2 POINTS ECAH ITEM)

_______________________1. Expressed as a percentage, the net profit margin shows

how much of each dollar collected by a company as revenue translates into profit.

_______________________2. is calculated by dividing a company's total liabilities by its

shareholder equity.

_______________________ 3. measure used to quantify a company's effectiveness in

collecting its receivables or money owed by clients

_______________________ 4. Current assets to current liabilities, calculated by

dividing your current assets by your current liabilities.

________________________5. Determined from a company's financial information

and used for comparison purposes.

________________________ 6. A measurement of efficiency – and ultimately its

success or failure.

_________________________7. state of being resistant to change and not prone

to wild fluctuations in emotion. An example of stability is a calm, stable life where
you don't have wild ups and downs.

_________________________ 8. Ability of a company to meet its long-term debts and

other financial obligations. 

__________________________ 9. Refers to the ease with which an asset, or security,

can be converted into ready cash without affecting its market price.
__________________________10. Along with liquidity and viability, solvency 
viability, solvency enables businesses to continue operating. This is important because
every business has problems with cash flow occasionally, especially when starting out. If
businesses have too many bills to pay and not enough assets to pay those bills, they will
not survive.

II- Multiple Choice

Choose and encircle the correct letter that best describe the question or
complete the statement.
1. Which of the following BEST describe s the captions when sales is deducted by
Cost of Sales?
A. Net Sales
B. Goods available for sale
C. Gross Profit
D. Net Income
2. Which of the following is NOT a Nominal account?
A. Salaries and Wages
B. Rent Expense
C. Advertising Expense
D. Cash
3. Which of the following is under Current Assets?
A. Promissory Notes C. Bonds with maturity of389 days
B. Notes Payable D. Goodwill
4. Which of the following is under Liabilities?
A. Marketable Securities C. Net Income
B. Advances from employees D. Withdrawals from Capital
5. Which of the following is under Owners Equity?
A. Accounts Receivable C. Revenue
 B. Accounts Payable D. Bonds
6. What is the other presentation form of Financial Position Statement aside from
count form presentation?
A. Informative form C. Formal form
B. Casual form D. Report form
7. What do you call those account extended in the balance sheet?
A. Nominal Account C. Diagnostic Account
B. Real Account D. Fake Account
8. Which of the following is not included as financial instrument?
A. Central Bank C. Equity loan
B. Convertible bonds D. Simple Bond
9. Which of the following is not included as financial institutions?
A. Central Bank C. Sunlife of Canada
B. Internet bank D. Capital Budgeting

10. Which of the following is considered as financial instrument

A. Equity loan C. Convertible bonds
B. Brokerage Firm D. All of the above