GROUP 3

TOPIC 1

Financial Performance Tools (Padua)

Companies use financial-performance tools to determine whether operating strategies are working.
Corporate leadership relies on them to project financial success and cushion the effect of flaws in previously
issued operating forecasts. By comparing prior data with current information, management can detect errors and
adjust present-period performance data based on economic conditions and the competitive landscape. Financial
tools include accounting reports and performance metrics.

Definition, Significance and Function of:

Definition Significance Function

1. Financial Planning – Financial Planning is the Financial Planning helps - Determining capital
(Luacan) process of estimating the in ensuring a reasonable requirements
capital required and balance between outflow and - Determining capital
determining its competition. inflow of funds so that structure
It is the process of framing stability is maintained. Also, - Framing financial policies
financial policies in relation it ensures that the suppliers - Ensures that the scarce
to procurement, investment of funds are easily investing financial resources are
and administration of funds in companies which exercise maximally utilized in the
of an enterprise. financial planning. best possible manner.
Financial Planning helps
in making growth and
expansion programmed
which helps in long-run
survival of the company.

2. Budgeting – (Castro) Budgeting is the process Since budgeting allows - Budgets Improve
of creating a plan to spend you to create a spending plan - Coordination
your money. This spending for your money, it ensures - Budgets help management
plan is called a budget.  that you will always have to coordinate in the
enough money for the things following ways.
you need and the things that - Budgets Improve
are important to you. - Communication
Following a budget or - Budgets Provide a Basis of
spending plan will also keep Control and Performance
you out of debt or help you Evaluation
work your way out of debt if
you are currently in debt.
3. Budgetary Control – Budgetary control is the A budgetary control is a - Setting up of budgets
(Galanida) process of determining mechanism that helps senior - Policymaking
various actual results with managers ensure that - Comparing the actual and
budgeted figures for the spending limits are adequate. budgeted results.
 enterprise for the future This control is important - Taking corrective steps and
period and standards set then because spending excesses remedial measures,
comparing the budgeted have an unfavorable impact (if possible) or Revising the
figures with the actual on corporate profits. budgets (if required).
performance for calculating - Placing responsibility when
variances, if any. First, there is a failure to attain the
budgets are prepared, and target.
then actual results are
recorded. Budgetary control implies
a system that involves an
ongoing comparison of the
actual performance with the
budgets and taking remedial
steps immediately, to ensure
adherence to the plan.

4. Financial Leverage – Financial leverage is the Leverage is an essential Financial leverage is

(Perez) use of debt to buy more tool a company's favorable when the uses to
assets. Leverage is employed management can use to which debt can be put
to increase the return on make the best financing and generate returns greater than
equity. However, an investment decisions. the interest expense
excessive amount of Leverage is also an associated with the debt.
financial leverage increases important technique in Financial leverage also
the risk of failure, since it investing as it helps presents the possibility of
becomes more difficult to companies set a threshold disproportionate losses,
repay debt. for the expansion of business since the related amount of
operations. For example, it interest expense may
can be used to recommend overwhelm the borrower if it
restrictions on business does not earn enough returns
expansion once projected to offset the interest expense.
return on additional
investment is lower than cost
of debt.

5. Operating Leverage- Operating Leverage is a The difference between When using the operating
(Magsipoc) cost -accounting formula the total sales revenues and leverage measurement,
that measures the degree to the variable costs is referred constant monitoring of
which a firm or project can to as the Contribution. The operating leverage is more
increase operating income Contribution is assessed to important for a firm having
by increasing revenue. A see how effectively it can high operating leverage,
business that generates sales cover your fixed costs. since a small percentage
with a high gross margin and Operating leverage, change in sales can result in
low variable costs has high essentially, measures the a dramatic increase (or
operating leverage. proportion of fixed costs to decrease) in profits.
your overall costs. Higher A firm must be especially
Operating Leverage means careful to forecast its sales in
that you have more fixed these situations, since a
costs in your cost structure. small forecasting error
Lower operating leverage translates into much larger
means that you have less errors in both net income
fixed costs in your cost and cash flows.
 structure.

6. Contribution Margin– Contribution Margin is a Contribution Margin is The contribution margin

(Marquez) product’s price minus all important because it shows concept is useful for
associated variable costs, how much money is deciding whether to allow a
resulting in the incremental available to pay the fixed lower price in special pricing
profit earned for each unit costs such as rent and situations.
sold. It shows how much utilities, that must be paid It is also useful for
revenue is left over after even when production or determining the profits that
variable expenses, the output is zero. will arise from various sales
contribution margin per unit levels.
shows how much profits will The contribution margin
increase with the sale of concept can be applied
each unit. throughout a business, for
individual products,

product lines, profit centers,

subsidiaries, distribution
channels, sales by customer,
and for an entire business.

7. Time value of money – The time value of money It’s a significant idea for - It will help you find out
(Idanan) (TVM) is the idea that investors, as today's dollar is which choice is best when
because of its eventual worth more than a dollar dealing with interest,
earning power, money you expected in the future. The inflation, risk and return.
now have is worth more than dollar currently on hand can  
the same amount in the be used for saving and - It will help you understand
future. This core finance gaining interest or capital how much money you can
theory holds that the money gains. Due to inflation, a save on an account if you
given will gain interest, dollar that was expected in have a certain goal in mind.
every sum of money is worth the future is now worth less
more the faster it is earned. than a dollar today.
The current discounted value
is often referred to as TVM.

TOPIC 2
Working Capital Management

A. Definition, Significance and Function of:

Definition Significance Function

 1. Working Capital Working capital Proper management of Working capital
Management – management is a business working capital is essential management is a broad-
(Padua) strategy designed to ensure to a company’s fundamental based function. Effective
that a company operates financial health and execution requires managing
efficiently by monitoring operational success as a and coordinating several
and using its current assets business. A hallmark of tasks within the company,
and liabilities to the best good business management including managing short-
effect. The primary purpose is the ability to utilize term investments, granting
of working capital working capital management credit to customers and
management is to enable the to maintain a solid balance collecting on this credit,
company to maintain enough between growth, profitability managing inventory, and
cash flow to meet its short- and liquidity. A business managing payables.
term operating costs and uses working capital in its Effective working capital
short-term debt obligations. daily operations; working management also requires
A company's working capital capital is the difference reliable cash forecasts, as
is made up of its current between a business's current well as current and accurate
assets minus its current assets and current liabilities information on transactions
liabilities. or debts. Working capital and bank balances.
serves as a metric for how
efficiently a company is
operating and how
financially stable it is in the
short-term. The working
capital ratio, which divides
current assets by current
liabilities, indicates whether
a company has adequate
cash flow to cover short-
term debts and expenses.
2. Cash Management – Cash management is the Just like a ‘no cash To overcome the
(Luacan) efficient collection, situation’ in our day to day uncertainty about cash flow
disbursement, and lives can be a nightmare, for prediction and to maintain
investment of cash in an a business it can be coincidence in cash inflow
organization while devastating.  Especially for and outflow, the firm's cash
maintaining the company’s small businesses, it can lead management function should
liquidity. In other words, it is to a point of no return. It consist of following
the way in which a particular affects the credibility of the strategies:
organization manages its business and can lead to 1. Turn over inventory as
financial operations such as them shutting down.  Hence, quickly as possible, avoiding
investing cash in different the most important task for stock-out that may result in a
short-term projects, business managers is to loss of sales.
collection of revenues, manage cash. 2. Pay accounts payable as
payment of expenses, Management needs to late as possible without
and liabilities while ensuring ensure that there is adequate deteriorating
it has sufficient cash cash to meet the current the firm's credibility but take
available for future use. obligations while making advantage of any favorable
sure that there are no idle cash discount.
funds. This is very important 3. Collect account
as businesses depend on the receivables as quickly as
recovery of receivables. If a possible without losing
debt turns bad (irrecoverable future sales due to high-
debt) it can jeopardize the pressure collection
 cash flow.  Therefore, cash techniques. Cash discounts,
management is also about if any are economically
being cautious and making justifiable, may be used to
enough provision for accomplish this objective.
contingencies like bad debts, 4. Involve in cash planning
economic slowdown, etc. to determine deficit or
surplus cash in each period.
5. Surplus cash must be
invested into marketable
securities.

3. Receivable Management It is the process of Effective management Cash flow is always

(Castro) making decisions relating to solutions can improve considered as the bloodline
investment in trade debtors. collection rates, which will of any business organization.
Collecting the payments due boost cash flow and free up Badly managed Receivables
for Sales in a timely manner. working capital for your can break the company.
business. This will prevent Most of the companies that
existing capital from going go bankrupt have Cash flow
to waste, which increases problems. Companies with a
liquidity. Hopefully, you are lack of profit can survive,
starting to see why proper but a lack of cash flow is
AR Management is of vital fatal.
importance to your Working Capital is one of
company’s growth and the costliest forms of capital.
survival. One of the ways of
calculating working capital
requirements can be defined
as the difference between
Sales and Receivables. Bad
collections can mean higher
working capital
requirements. Which means
higher interest costs for the
company.
A reliable and predictable
Receivables will ensure
steady cash flow
management of the
organization. Amounts
receivables with no due
dates are useless.

4. Inventory Management Inventory management is  Inventory control Inventory management is

(Galanida) an approach for keeping paves for competitive a determining point in the
track of the flow of ability strategic management of any
inventory. It starts right from  Inventory planning organization.
the procurement of goods improves service level The main function of
and its warehousing and  Inventory planning and inventory management is to
continues to the outflow of management reduces determine the enough and
the raw material or stock to storage cost type of input products,
reach the manufacturing products in process and
 units or to the market,  High inventory turnover finished products,
respectively. The process brings revenues facilitating production and
can be carried out manually  You can utilize sales operations and
or by using an automated warehouse space better minimizing costs by keeping
system.  Inventory control makes them at an optimal level.
cost accounting activities Efficient inventory
easier management is essential to
 Inventory control is ensure that the business has
consistent with safety enough products stored to
and economic advantage meet consumer demand. If it
 Regular supply at is not handled correctly it
reasonable prices builds can result in the business
customer confidence losing money on potential
 Inventory holding results sales that cannot be satisfied
in effective utilization of or that you waste money
human and equipment taking care of too much
inventory. An inventory
 Effective inventory
management system can
control enhances market
prevent these types of errors
share
from occurring.
 Inventory control
improves product quality
 Effective inventory
control brings the
potential saving
 Inventory control avoids
costly interruptions in
operation
 Inventory control
strategy facilitates
purchase economies

5. Economic Order EOQ stands for Economic The Economic Order The Economic Order
Quantity - (Perez) Order Quantity. It is a Quantity is a set point Quantity formula is
measurement used in the field designed to help companies calculated by minimizing the
of Operations, Logistics, and minimize the cost of total cost per order by setting
Supply Management. EOQ is a ordering and holding the first-order derivative to
tool used to determine the inventory. The cost of zero. The components of the
volume and frequency of ordering inventory falls with formula that make up the
orders required to satisfy a the increase in ordering total cost per order are the
given level of demand while volume due to purchasing on cost of holding inventory
minimizing the cost per order. economies of scale. and the cost of ordering that
However, as the size of inventory. The key notations
inventory grows, the cost of in understanding the EOQ
holding the inventory rises. formula are as follows:
EOQ is the exact point that
minimizes both inversely
related costs.

B. Enumerate and explain inventory control systems

Main Inventory Control System Types:
Periodic inventory system (Marquez) - is a method of inventory valuation for financial reporting purposes in
which a physical count of the inventory is performed at specific intervals. It only updates the ending inventory
balance in the general ledger when a physical inventory count is conducted. Since physical inventory counts are
time-consuming, few companies do them more than once a quarter or year. In the meantime, the inventory
account in the accounting system continues to show the cost of the inventory that was recorded as of the last
physical inventory count.

Under the periodic inventory system, all purchases made between physical inventory counts are
recorded in a purchases account. When a physical inventory count is done, the balance in the purchases account
is then shifted into the inventory account, which in turn is adjusted to match the cost of the ending inventory.

The calculation of the cost of goods sold under the periodic inventory system is:

Beginning inventory + Purchases = Cost of goods available for sale

Cost of goods available for sale – Ending inventory = Cost of goods sold

For example, Marquez Corporation has a beginning inventory of $100,000, has paid $170,000 for purchases,
and its physical inventory count reveals an ending inventory cost of $80,000. The calculation of its cost of
goods sold is:

$100,000 Beginning inventory + $170,000 Purchases - $80,000 Ending inventory

= $190,000 Cost of goods sold

Perpetual inventory system (Magsipoc) - is a method of inventory management that records real-time
transactions of received or sold stock using technology – generally considered a more efficient method than a
periodic inventory system. Each time a transaction is made, the perpetual inventory system should update all the
relevant information to the company’s accounting system.
Perpetual inventory is an accounting method that records the sale or purchase of inventory through a
computerized point-of-sale (POS) system. The perpetual method allows you to regularly update your inventory
records to help prevent situations like running out of stock. Adopting a perpetual inventory system records
interaction that are useful for demand forecasting and other performance indicators down the line. Information
like stock quantity and availability is integral because you must ensure that stockouts don’t happen. As
technology begins to take over every part of business and accounting practices, and inventory can be calculated
using computers and scanners, perpetual inventory tracking is becoming less burdensome.
Perpetual Inventory Journal Entries
The following example contains several journal entries used to account for transactions in a perpetual inventory
system:
1. To record a purchase of $1,500 of widgets that are stored in inventory:

Debit Credit
Inventory 1,500
Accounts payable 1,500

2. To record $300 of inbound freight cost associated with the delivery of inventory:
Debit Credit
Inventory 300
Accounts payable 300

3. To record a sale of widgets from inventory for $3,000, for which the associated inventory cost is $1,800:
Debit Credit
Accounts receivable 3,000
Revenue 3,000
Cost of goods sold 1,800
Inventory 1,800
4. To record a downward inventory adjustment of $800, caused by inventory theft, and detected during an
inventory count:
Debit Credit
Inventory shrinkage expense 800
Inventory 800

Types of Inventory Management Systems within Inventory Control Systems: 

1. Barcode System (Idanan)
 A barcode system is a hardware and software network which mainly consists of mobile computers, printers,
handheld scanners, infrastructure, and software support. Barcode systems are used to automate data collection
where hand recording is neither timely nor cost effective.

Barcoding systems are not radio-frequency identification (RFID) systems even though the companies that
provide barcode equipment will often also provide RFID equipment and many companies use both technologies
as part of larger resource management systems. It can also help in significantly improving your productivity in
incredibly easy but essential ways and can also save you a lot of time and money in all kinds of business areas.
A typical barcode inventory system includes hardware, such as barcode printers and scanners and software that
runs on computers and mobile devices that allow for barcode scanning and other operations.

2. Radio Frequency Identification (RFID) System (Padua)

RFID tags transmit data about an item through radio waves to the antenna/reader combination. ... The energy
activates the chip, which modulates the energy with the desired information, and then transmits a signal back
toward the antenna/reader. Stock control and inventory Radio Frequency Identification (RFID) allows a
business to identify individual products and components, and to track them throughout the supply chain from
production to point-of-sale. FID is a technology that uses radio waves for communication between a tag and a
reading device.

TOPIC 3
Business Combination
A. Definition of:

DEFINITION
Merger (Luacan) The combination of one or more corporations, LLCs, or
other business entities into a single business entity; the
joining of two or more companies to achieve greater
efficiencies of scale and productivity

Consolidation (Castro) In business can mean combining separate companies.

For example, combining product lines or functional areas
into one. It is a type of merger, but in this case, we create a
new legal entity.
Goodwill (Galanida) In business can mean combining separate companies.
For example, combining product lines or functional areas
into one. It is a type of merger, but in this case, we create a
new legal entity.

Hostile take-over (Perez) A hostile takeover is the acquisition of one company

(called the target company) by another (called the acquirer)
that is accomplished by going directly to the company's
shareholders or fighting to replace management to get the
acquisition approved. A hostile takeover can be
accomplished through either a tender offer or a proxy fight.

Leverage (Magsipoc) Leverage results from using borrowed capital as a

funding source when investing to expand the firm's asset
base and generate returns on risk capital. Leverage is an
investment strategy of using borrowed money specifically,
the use of various financial instruments or borrowed capital
to increase the potential return of an investment. Leverage
can also refer to the amount of debt a firm uses to finance
assets. When one refers to a company, property or
investment as "highly leveraged," it means that item has
more debt than equity.

Buy-out (Marquez) Involves the acquisition of a majority of the voting

shares of a business. The intent of a buyout is to gain
control over the operating and financial decisions of an
acquire. It occurs when a buyer acquires more than 50% of
the company, leading to a change of control. An acquirer
may engage in a buyout for a number of reasons, including
the following:

 To acquire control over a key product

 To gain ownership of certain rights, such as airport
gate leases
 To prevent technology from being made available to
competitors
 To enter a new market
Controlling Interest (Idanan) Controlling interest gives a shareholder or group of
shareholders significant influence over the actions of a
company. A party can achieve controlling interest if the
ownership stake in a company is proportionately substantial
relative to total voting stock. With most large public
companies, for example, a shareholder with much less than
50% of the outstanding shares may still have a lot of
influence at the company. Single shareholders with as little
as 5% to 10% ownership can push for seats on the board or
enact changes at shareholder meetings by publicly lobbying
for them, giving them control.

Minority Interest (Padua) In accounting, minority interest is the portion of a

subsidiary corporation's stock that is not owned by the
parent corporation. The magnitude of the minority interest
in the subsidiary company is generally less than 50% of
outstanding shares, or the corporation would generally
cease to be a subsidiary of the parent.

B. Different types of Business Combination, Pros & Cons, Example of each

Meaning Pros Cons Example
1. Horizontal It refers to The following The following are Facebook's 2012
combination of are the the disadvantages of acquisition of
Combination businesses engaged in the advantages of horizontal Instagram
production of the same horizontal combinations:
type of product or combinations: 1. It may lead to
engaged in the same 1. Avoidance of monopoly
trade. wasteful situations.
competition. 2. It may result in
2. It ensures restriction of output,
better control increase in prices
over markets. and exploitation of
3. It helps realize consumers.
economies of 3. When the
 scale. business grows
4. It aids beyond a size,
standardization control becomes
of products. difficult.

2. Vertical It is the combination 1. Self- 1. Difficulty of A spinning mill

of firms that are sufficiency vertical expansion combining with a
Combination dependent on one another 2. Regular 2. No benefit of readymade garment
– one's finished product Supply of raw economies scale manufacturer, an
being the raw material material 3. Higher iron and steel
for another. 3. Maintenance of interdependence company combining
quality 4. Conflict with an iron ore
4. Lower costs 5. Inflexibility mining company
5. Elimination of etc.
middlemen
 The Apple
6. Customers
satisfactions Model
7. Technical  The Netflix
economies Model
8. Opportunity for
expansion
9. Stability
3. Circular It is when the Advantages of 1. Problems in co- Joint venture
industrial units producing Circular ordination formed in 2017
Combination different varieties of combination to 2. Concentration of between McLeod
articles combine to make Combining Firm economic power Russel, one of the
use of the same 3. Loss of world’s largest tea
distribution outlets, that 1. Efficient employment plantation
combination is known as management companies, with
circular combination. 2. Economies in Eveready Industries
This type of combination operations India Ltd, a battery
is also known as mixed and flashlight
combination. manufacturer.

The firms entering Advantages of

mixed combinations are Circular
quite dissimilar and non- combination to
competitors. None of the the consumers
features of other types of
combination are found in 1. Evils of
this type. The important monopoly
object of this voided
combination is to secure 2. Spread of
the benefits of benefits
administrative
integration.
 4. Lateral It refers to the 1. Finished 1. Establishment A chocolate bar
integration of business product of one and management manufacturer
Combination units producing and company is the cost can be merged with a
selling different but raw material for increased. luxury chocolate
allied products. The one major firm.  2. May produce manufacturer.
lateral combination may 2. No production similar products.
be either convergent or waste
divergent. Convergent 3. The product of
lateral combination arises one firm
when firms producing becomes the raw
different products but material of the
supplying to a common other firms
user join with him. The which have
example of divergent combined with
lateral integration is it.
provided by a flourmill
supplying flour to several
units like bakery,
confectionary, and hotel.
Under divergent
integration, markets are
diversified, and risks are
scattered.

5. Diagonal When two or more 1. It helps in 1. Business A machinery

business entities achieving self- combination brings manufacturer
Combination performing subsidiary sufficiency in monopoly in the combining with a
services join themselves operations. market, which may repair workshop, an
is called diagonal 2. It ensures be harmful for the electronic goods
combination. For regular and society. manufacturer
example, joining of uninterrupted 2.Management of combining with a
automobile manufacturer service to the the company retailers showroom
with a firm providing manufacturing becomes difficult. or with a firm
repairs and maintenance industry. 3. Business providing repairs
service. It is also known 3. Wastage of combination may and maintenance
as services combination. time due to result in over- service, an
The main objective of breakdowns is capitalization. automobile
this type of combination reduced to a company combining
is to make business unit great extent. with a transport
large and self-sufficient. 4. It ensures company which
services of the transports its
required quality automobiles In such
and standards. cases, the services
5. Costs of required for the
services is main process of
maintained at a production is
stable rate provided within the
without undue organization itself. It
increase. is also known as
6. The main services
organization combination.
need not depend
on outside
suppliers.