Finance: Definition

A. Nature/Purpose

Finance is the efficient acquisition, allocation,

and utilization of funds.

1. Service- are engaged in rendering

service.

Finances functions entail the:

2. Trading/Merchandising- engaged in
buying and selling merchandise.

a) Allocating available funds

3. Manufacturing- are those which buy raw

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

b) Acquiring needed funds

c) Utilizing these funds to achieve set
goals.

4. Banking and Finance- deals with

institutions involved in lending and
borrowing.

Classification of Finance

A. Form of Negotiation
1. Direct Finance- involves direct
borrowing.

5. Mining/Extractive Industries- extract

natural resources like the gold mining.

2. Indirect Finance- involves the use of

financial intermediaries (financial
institutions acting as middlemen),
hence, also called financial
intermediation.

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.

Classification of Finance

B. User

1. Public Finance- deals with sources and

uses of funds of the government.

1. Sole or Single Proprietorship

2. Partnership
3. Corporation

a) Personal Finance- concerned

with individuals and households.

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

Types of Business Organizations

B. Ownership

2. Private Finance- involves individuals

and entities.

b) Finance of Non-Profit
Organizations- concerned with
charitable organizations which
are not concerned with profitmaking.

Types of Business Organizations

4. 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 formation
2. Needs only minimum capitalization
3. Sole decision maker
4. Easy to terminate

Disadvantage of a Sole Proprietorship

1. Unlimited liability

2. Limited access to capital

3. Limited skills, talents, and capabilities

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.

4. Inability to attract or retain good employees

5. Limited term of existence
6. Difficulty in measuring success
7. 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

Characteristics of a Partnership

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.

1. Contract of partnership

2. Two or more persons with legal capacity to enter

into a contract

1. Limited Life

3. Valuable contribution (money, property, or

industry) to a common fund
4. 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.

Characteristics of a Partnership

2. Unlimited Liability
3. 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.

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.

Disadvantage of a Partnership

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 Partnership

1. 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.

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

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.

5) Promoters- persons who undertake to form and

organize a corporation bringing together the
incorporators or persons interested n the
corporation.

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.

6) Board of Directors- stockholders voted into the

position as director.

Characteristics of a Corporation

1. Separate legal existence

2. Created by operation of law
3. Transferable units of ownership
4. Limited liability of stockholders

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. Promotion
2. Incorporation
3. Formal Organization and Commencement of
Business Operations

5. Continuity of existence

a) Adoption of By-laws

6. Centralized management by the Board of

Directors

b) Election of the Board of Directors

Advantages of a Corporation

1. Artificial being
2. Limited liability of shareholders
3. Transferability of shares
4. Continuity of life of the corporation
5. Greater ability to acquire funding
6. Greater ability to acquire talents, skills, and
expertise.

c) Election of Officers

Parties to a Corporation

1. Corporators- are those who compose the

corporation whether they are stockholders or
members.

d) 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.

Classification of Corporations

A. As to Purpose
1. For profit (civil)
2. Non-profit
3. Charitable
a) Ecclesiastical/Religious

b) Eleemosynary/Public Charity

1. De jure Corporation- is a corporation

existing in fact and in law.

c) Foundation

2. De facto Corporation- is a corporation in

fact but not in law.

Classification of Corporations

Other private corporations are:

a) Quasi-public corporations

F. As to Relation to Other Corporations

b) Government-owned or controlled
corporations

1) Parent or Holding Corporationthis is the original corporation

from which another corporation,
called subsidiary or sister
company emanates.

c) Wasting assets corporations

Classification of Corporations

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

B. As to How Membership Is Represented

1. Stock Corporation- these are
corporations of which membership is
represented by shares of stock.
a) Open corporations
b) Closed corporations

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

2. Non-stock Corporation- these are

corporations other than stock
corporations.

Classification of Corporations

C. As to the State of Incorporation

1. Value on the stock certificate

a) 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.

1. Domestic Corporation- considered

domestic in the state/country fro which it
obtain its charter.
2. Foreign Corporation

b) No-par Value Shares- are shares

without any money value appearing on
the face of the stock certificate.

a) Resident Foreign Corporation

b) Non-resident Foreign
Corporation
3. Multinational Corporation extend their
operations in other countries.

Classification of Corporations

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.

Classification of Corporations

E. As to Legal right to Corporate Existence

Classification of Corporations

Classes of Shares/Kinds of Stock

2. Rights to dividends
a. 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.

common shares have

received dividends at
the same rate as the
preferred.

Classes of Shares/Kinds of Stock

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

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

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.