Introduction to finance

Introduction to FinanceChapter II

Finance: Definition

Finance is the efficient acquisition, allocation, and utilization of funds.

Finance’s functions entail the:a) Allocating available fundsb) Acquiring needed fundsc) Utilizing these funds to achieve set goals.

Classification of Finance

A. Form of Negotiation1. Direct Finance- involves direct borrowing.

2. Indirect Finance- involves the use of financial intermediaries (financial institutions acting as middlemen), hence, also called financial intermediation.

Classification of Finance

B. User1. Public Finance- deals with sources and

uses of funds of the government.2. Private Finance- involves individuals and

entities.a) Personal Finance- concerned with individuals

and households.b) Finance of Non-Profit Organizations- concerned

with charitable organizations which are not concerned with profit-making.

c) Business Finance- concerned with entities and individuals engaged in business.

Finance in the Business World

• Business- is any lawful economic activity that involves rendering service.

• Efficiency- is accomplishing something at the least cost.

• Effectiveness- is getting things done and attaining objectives.

Efficiency + Effectiveness = Productivity

Types of Business Organizations

A. Nature/Purpose1. Service- are engaged in rendering service. 2. Trading/Merchandising- engaged in buying

and selling merchandise.3. Manufacturing- are those which buy raw

materials and process the same to convert them into finished products which they sell.

4. Banking and Finance- deals with institutions involved in lending and borrowing.

Types of Business Organizations 5. Mining/Extractive Industries- extract

natural resources like the gold mining.6. Construction Companies- engaged in

road buildings, etc.7. Genetic Industries- involved in the

production of certain species of plants and animals like agriculture, fishing, etc.

Types of Business Organizations

B. Ownership1. Sole or Single Proprietorship2. Partnership3. Corporation4. Cooperative

Sole or Proprietorship

Is a business unit owned and controlled by a single individual.

The owner of the proprietorship is referred to as a sole proprietor or a single proprietor.

Sole proprietorship is the simplest business entity and the easiest to form or put up.

Advantages of Sole Proprietorship

1. Ease of formation2. Needs only minimum capitalization3. Sole decision maker4. Easy to terminate

Disadvantage of a Sole Proprietorship

1. Unlimited liability2. Limited access to capital3. Limited skills, talents, and

capabilities4. Inability to attract or retain good

employees5. Limited term of existence6. Difficulty in measuring success7. Personal problems may hinder

operation/success

Partnership

Is an association of two or more persons who have agreed to contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves.

The owners of a partnership are called partners.

Essential Requisites of a Partnership

1. Contract of partnership2. Two or more persons with legal capacity to

enter into a contract3. Valuable contribution (money, property, or

industry) to a common fund4. Intention to divide the profits between or

among the partners.5. Lawful purpose(s)

Characteristics of a Partnership

A. Mutual Agency- every partnership is an agent of the partnership, so long as it is within the scope of the partnership, bind the partnership.

B. Voluntary association- being a partner is voluntary. Each partner is entitled to choose his partners.

C. Based on Contract- there must be an agreement which can be oral or written that will bind the partnership.


D. Limited Life- the partnership is dissolved/terminated once a partner withdraws, dies, becomes bankrupt, becomes legally incapacitated, or a new partner(s) is admitted into a partnership.

E. Unlimited Liability- a general partner and an industrial partner are liable for partnership debts up to extent of their personal assets after partnership resources have been exhausted.


F. Division of Profits/Losses- profits and losses are divided between/among partners in accordance with their agreement, or in the absence of such an agreement, in accordance with their capital balances.

G. Co-ownership of Contributed Assets- partners become co-owners in assets contributed by any partner to the partnership.

Advantages of a Partnership

1. Ease of formation.2. Allows pooling of financial resources.3. Allows pooling of skills, expertise,

and experience of partners.4. Less government control,

supervision, and intervention.

Disadvantage of a Partnership

1. Limited Life2. Unlimited Liability3. Mutual Agency

Organizing a Partnership

To organize a partnership, persons desiring to become partners draw up a contract either orally or writing, which will govern the formation, operation, and dissolution of the partnership.

Types of Partnership as to Liability of Partners

1. General Partnership- all partners are general partners.

2. Limited Partnership- there is at least one limited partner (could be more) and at least one general partner.

Types of Partners

A. As to Liability 1. General Partner- liable for partnership

debts up to the extent of their personal assets.

2. Limited Partner- liable for partnership debts only up to the extent of their interest (investment and profits) in the partnership.

Types of Partners

B. As to Investment in the Partnership1. Capitalist Partner- a partner who

contributes money and/or non-cash assets in the partnership.

2. Industrial Partner- a partner who contributes skill or industry in the partnership.

3. Capitalist-Industrial Partner- a partner who contributes cash plus and/or other assets and industry or skill in the partnership.

Corporation

an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incident to its existence.

Corporation Code of the Philippines defines corporation as an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.

Characteristics of a Corporation

1. Separate legal existence2. Created by operation of law3. Transferable units of ownership4. Limited liability of stockholders5. Continuity of existence6. Centralized management by the

Board of Directors

Advantages of a Corporation

1. Artificial being2. Limited liability of shareholders3. Transferability of shares4. Continuity of life of the corporation5. Greater ability to acquire funding6. Greater ability to acquire talents,

skills, and expertise.

Parties to a Corporation

1. Corporators- are those who compose the corporation whether they are stockholders or members.

2. Incorporators- founders of the corporation; are signatories to the Articles of Incorporation.

3. Stockholders- owners of shares of stock in a corporation

4. Members- corporators of a non-stock corporation, the counterpart of shareholders/stockholders of a stock corporation.

Parties to a Corporation

5) Promoters- persons who undertake to form and organize a corporation bringing together the incorporators or persons interested n the corporation.

6) Board of Directors- stockholders voted into the position as director.

7) Corporate Officers- are those elected by the Board of Directors to run the corporation.

Incorporation and Organization of a Corporation

3 Steps in the Organization of a Corporation

1. Promotion2. Incorporation3. Formal Organization and Commencement

of Business Operationsa) Adoption of By-lawsb) Election of the Board of Directorsc) Election of Officersd) Commencement of business operations

Classification of Corporations

1. Public Corporation- are corporations organized for the government of a portion of the state.

2. Private Corporation- all corporations other than government are private.


A. As to Purpose1. For profit (civil)2. Non-profit3. Charitable

a) Ecclesiastical/Religiousb) Eleemosynary/Public Charity

4.Foundation


Other private corporations are:a) Quasi-public corporationsb) Government-owned or controlled

corporationsc) Wasting assets corporations


B. As to How Membership Is Represented1. Stock Corporation- these are corporations of

which membership is represented by shares of stock.

a) Open corporationsb) Closed corporations

2. Non-stock Corporation- these are corporations other than stock corporations.


C. As to the State of Incorporation1. Domestic Corporation- considered domestic

in the state/country fro which it obtain its charter.

2. Foreign Corporationa) Resident Foreign Corporationb) Non-resident Foreign Corporation

3. Multinational Corporation – extend their operations in other countries.


D. As to Number of Persons Composing the Corporation

1. Corporation Sole- this is only applicable to the Church.

2. Corporation Aggregate- this is the common form of corporation where there are several stockholders.


E. As to Legal right to Corporate Existence1. De jure Corporation- is a corporation

existing in fact and in law.2. De facto Corporation- is a corporation in

fact but not in law.

Classification of CorporationsF. As to Relation to Other Corporations

1) Parent or Holding Corporation- this is the original corporation from which another corporation, called subsidiary or sister company emanates.

2) Subsidiary or Sister Corporation- this is the corporation whose shares of stock are owned in majority by the parent or holding company.

Corporate Capital

Ownership in a corporation is represented by its capital stock. Capital stock is divided into units to facilitate the transfer of ownership and distribution of profits. Each of the units of capital stock is referred to as the share of stock.

Classes of Shares/Kinds of Stock

1. Value on the stock certificatea) Par Value Shares- are shares of which the

specific money value is shown on the face of the stock certificate and fixed in the Articles of Incorporation.

b) No-par Value Shares- are shares without any money value appearing on the face of the stock certificate.


2. Rights to dividendsa. Common shares- a corporation issues only

one class of stock.b. Preferred shares- a corporation issue more

than one class of stock, one with preferential rights over another class.

1. As to assets- upon liquidation mean that such shares shall be given preference over common shares in the distribution of the assets of corporation in case of liquidation.

2. As to dividends- refers to shares with preferential rights to share in the earnings of the corporation.


a) Cumulative- are entitled to receive all passed dividends in arrears.

b) Non-cumulative- are not entitled to passed dividends.

c) Participating- are entitled not only to stipulated dividend, but they also share with the common stock in the dividends that may remain after the common shares have received dividends at the same rate as the preferred.

d) Non-Participating- are entitled to a fixed amount or rate of dividend only.

Cooperative

Organization established by members to provide themselves with goods and services or to produce and dispose of the products of their labor.

• Patronage refund- is the profit of the cooperative or credit union that is given back to the members.

Introduction to finance

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