Senior High School

Polytechnic University of the Philippines

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Business Finance

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Submitted by:
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Catherine P. Hilot
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ABM 12-1
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Submitted to:
Mr. Christian M. Fadriquela

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 Self – Test Questions
Chapter 1 (p.3)
1. What should be the most important goal of the company? Why?
- Shareholders’ wealth maximization should be the most important objective of the
management as it covers the different elements of operating a company and it considers the
different stakeholders in the organization. It also has an ability to increase the value of stocks
and it is a long-term goal of an organization.
2. Why is profit maximization supposedly not the most important goal of a company?
- Profit maximization can expose the company to more risks and may even result in operating
losses if some external shocks occur and adversely affect the company’s operation.
Borrowing is a part of it that can increase the profit but still it just a short-term goal.
3. What are the different factors that can influence the price of stock? Explain each briefly.
a. Providing good products and services at reasonable prices – management may have to
innovate, invest in technology, and be more efficient in their production and operation.
Management may also need to consider setting aside a certain percentage of income to

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research and development to further improve, and possibly, expand the company’s existing
product and service offerings.

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b. Consider the Interest of Employees – happy employees mean more productive employees.
If employees are happy in the workplace and they have a sense of belonging in the company,

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they will protect the interest of the company.
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c. Paying suppliers and creditors on time – It is important that management takes care of
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suppliers to ensure good quality of materials at reasonable prices. Good relationships with
creditors enhance the probability of getting credit facilities especially during times of
emergencies.
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d. Supporting the company where the company operates – Hiring employees from the
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community promotes employees’ support for the company.

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Chapter 1 (p.8)
1. Explain why the same company can be a saver and a user of funds.
- A company can be a saver and user of funds because an entity may have savings for now but
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may be needing funds in the future, for example, for expansion.

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2. What is the role or financial intermediaries in the financial system?

- They are the middleman. It is an institution that facilitates channelling of fund between the
savers (lenders) and the user of funds (borrowers).
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3. What is the role or function of the Philippines Stock Exchange?

- It provides a system for the trading of equity securities of publicly listed companies. They
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play a vital role in the functioning of the economy by providing the backbone to a modern’s
economic infrastructure.
4. What are the differences between the Philippines Stock Exchange and the stock brokerage
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firms?
- The Philippines Stock Exchange is where the brokers do their business while brokerage firms
are paying a membership in the (PSE) Philippines Stock Exchange. An individual who wants
to invest and trade in stock market cannot go directly to PSE to buy and sell stocks. He has to
open an account with an accredited stock brokerage firm where he can channel his buy and
sell orders of equity securities.

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 5. Explain the role of the banks in the financial system.
- Banks provide mechanism where savers can put their excess funds through deposits. Banks
give the depositors interest on the money deposited to them. To cover for the interest given to
depositors, banks lend the money to borrowers after performing a credit investigation.
6. Explain the differences among common stocks, preferred stocks, and debt securities.
A. Common stocks – common stockholders are the real owners of the company. Unlike,
preferred stocks, the dividend per share for common stocks is not fixed. A common stock
investor can receive more cash dividends during period of unusual profitability. Being the
residual owners of a company, common stockholders have voting rights, a privilege
generally not available to preferred stockholders.
B. Preferred stocks – it has a priority over a common stock in terms of claims over the
assets of a company. Preferred stockholders also have priority over common stockholders
in cash dividend declaration.
C. Debt securities – in terms of claims over the assets of a company, bondholders have
preference over preferred stocks and common stocks. Also, interest due to them, just like
bank creditors, has to be paid first before dividends are given to preferred and common

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Chapter 2 (p.20). Identify and describe.

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a. Statement of Financial Position –This financial report provides information regarding the

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liquidity position and capital structure of a company as of a given date.
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b. Statement of Profit or Loss – The statement of profit or loss or otherwise known as income
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statement provides information regarding the revenues or sales, expenses, and net income of a
company over a given accounting period.
c. Statement of Cash Flows – The statement of cash flows provides an explanation regarding the
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change in cash balance form one accounting period to another. The cash flows are also classified
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into three main categories: operating, investing, and financing.

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d. Statement of Changes in Stockholders’ Equity – This financial statement provides information

that explains the changes in the stockholders’ equity account from one accounting period to
another.
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Chapter 2 (p.23)
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1. Name the different steps in preparing financial statements

1) Analysing business transactions
2) Recording in the journals
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3) Posting to ledger accounts

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4) Preparing the unadjusted trial balance

5) Making the adjusting entries
6) Preparing the adjusted trial balance
7) Preparing the financial statements
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8) Making the closing entries

9) Post-closing trial balance
2. Give examples of financial statement accounts that will require adjusting entries when financial
statements are prepared.
1) Accruals

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 2) Prepayments
3) Depreciation and amortization expenses
4) Allowance for uncollectible accounts
3. What are closing entries?

- Income statement accounts such as revenues and expenses are closed to prepare the system
for the next accounting period. These income statement accounts are closed to the retained
earnings.
4. What is a post-closing trial balance?

- The post-closing trial balance is prepared to test if the debit balances equal the credit balances
after closing entries are considered. This is to ensure that the accounting system is working.
Chapter 3 (p. 52)
1. Why is planning important in the success of an organization?

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- Management planning is about setting the goals of the organization and identifying ways
to achieve them.

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2. How is controlling related to planning?

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Controlling goes beyond comparing plans with actual performance, but it takes off from
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planning. To be effective, controlling must include a reward system for those who deliver and
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a penalty for those who do not deliver whose reasons for failing to meet objectives are within
their control.
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3. Enumerate the different steps in planning and discuss each other.

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1) Set goals or objectives – the goals of a company can be divided into short-term (1 year),
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medium-term (1 – 3yrs), and long-term goals (5-10 years or longer).

2) Identify resources – resources include production capacity, human resources who will man the
operations and financial resources.
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3) Identify good-related tasks – management must figure out how to achieve and objective
4) Establish responsibility centers for accountability and timeline – if tasks are already identified
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to achieve goals, the next important step to do is to identify which department should be held
accountable for this task.
5) Establish an evaluation system for monitoring and controlling – the management must
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establish a mechanism which will allow plans to be monitored.

6) Determine contingency plans – contingencies must be considered as well. Budgets and
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projected financial statements are anchored on assumptions.

4. What is the importance of quantifying a plan?
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- Once a plan is set, it has to be quantified. A plan that is not quantified is useless because there
will be no basis for monitoring performance and hence, no way of gauging success.
Quantified plans re in the form of budgets and projected financial statements.
Chapter 3 (p.60)
1. Why is sales the most important financial statement account in forecasting?

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 - The most important statement account in forecasting is sales because almost all other
accounts in the financial statements are affected by sales.
2. Enumerate at least five external factors considered in sales forecasting.
1) Gross domestic product (GDP) growth rate
2) Interest rate
3) Foreign exchange rate
4) Income tax rates
5) Inflation
3. Enumerate at least five internal factors considered in sales forecasting.
1) Pricing
2) Promotion activities
3) Distribution
4) Production capacity
5) Human resources

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4. What is the meaning of positive EFN? A negative EFN?

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- If the extra funds needed (EFN) is put on the liabilities and stockholders’ equity section and
the amount is positive, this means that there will be additional financing. However, if the

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amount is negative, this means that there will be excess cash.
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Chapter 4 (p.87)
1. What are the advantages and disadvantages of debt financing?
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A. Advantages
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1) Interest expense is tax-deductible

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2) Debt financing allows the company to grow without diluting the interest of the
controlling stockholders
3) Creditors generally do not intervene in the decisions of the management.
B. Disadvantages
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1) Contractual obligation for the borrower to pay the interest and the principal.
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2) Payments have to be made on time because unpaid interest and principal lead to penalties
and more interest.
3) Too much debt can expose the company to a bankruptcy risk and this may disrupt the
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operations of the company.

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2. What are the advantages and disadvantages of equity financing?

A. Advantages
1) Safest source of financing for a company because it does not require any mandatory
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payment of dividends.
2) Provides the company financial flexibility
B. Disadvantages
1) Cash dividends are not tax-deductible
2) Offering new shares to other investors may dilute the ownership stake in terms of
percentage of the existing stockholders

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 3) It is the most expensive source of financing
3. Discuss the pecking order hypothesis in corporate finance.

- The pecking order hypothesis in corporate finance was developed based on repeated
observations of how companies fund their financing requirements.
1) Internally generated funds. These are the funds that come from operating cash flows
2) Debt. When internally generated funds have been exhausted, debt financing is the
next alternative.
3) Equity. The last in priority list of financing is equity financing. This is not surprising
given that it is more difficult to issue new shares of stocks.
4. Why is equity more expensive than debt?
1) Most companies opt to have debt financing
2) Under Philippines laws, a company which is in the process of liquidation cannot distribute
anything to the stockholders unless the claims of the creditors have been satisfied first
3) Unlike loans where interest and principal payments by borrowers are more assured, cash

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dividends are not guaranteed

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4) If a company does not perform well, the stockholders absorb the losses.

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5. Identify the different sources of short-term funds and long-terms funds.

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1) Suppliers’ credit rs e
A. Sources of Short-term funds B. Sources of long-term funds
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1) Equity investors
2) Advances from stockholders 2) Internally generated funds
3) Credit cooperatives 3) Banks
4) Bank loans 4) Bond market
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5) Lending companies 5) Lending companies

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6) Informal lending sources

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6. Discuss when to use short-term funds in business.

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- Short-term funds are normally used to finance the day-to-day operations of the company. It is
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used for working capital requirements such as accounts receivable and inventories. It can also
be used for bridge financing where a company has some maturing obligations and does not
have enough cash to pay such maturing obligations.
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7. Discuss when to use long-term funds in business.

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- Long-term funds are used for long-term investments or sometimes called capital investments.
This includes expansion, buying new equipment, or buying a piece of land which will be the
site of future expansion. Long-term funds can also be used to finance permanent working
capital requirements.
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8. Discuss the problems encountered by SMEs in getting financing form the banks.

- The lack of reliable information about SMEs makes it difficult for the potential fund
providers to assess their credit worthiness. Banks find it a lot easier to evaluate big companies
where there is abundance of disclosures and news about them. For SMESs, there is not much

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 information available as basis for determining their credit worthiness. This situation actually
derails the growth of these companies.

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