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Entrep Module 7 - Lecture Notes

Accountancy, Business, and Management (Baguio Central University)

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ENTREPRENEURSHIP
Quarter 2 – Module 7:
COMPUTE PROFITS AND
PROJECTED FINANCIAL STATEMENTS

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ENTREPRENEURSHIP – Grade 12
Alternative Delivery Mode
Quarter 2 – Module 7: Compute Profits and Projected Financial Statements
First Edition, 2020

Republic Act 8293, section 176 states that: No copyright shall subsist in any
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represent nor claim ownership over them.

Published by the Department of Education

Secretary: Leonor Magtolis Briones
Undersecretary: Diosdado M. San Antonio

Development Team of the Module

Writer: Amecia Ray D. Mamigo
Editor: Ellen E. Edrial, Ed.D.
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Antonio B. Baguio, Jr., Ed.D.

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ENTRPRENEURSHIP
Quarter 2 – Module 7:
Compute Profits and Projected
Financial Statements

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Introductory Message
For the facilitator:

Welcome to the Entrepreneurship 12 Alternative Delivery Mode (ADM) Module

on Compute Profits and Projected Financial Statements!

This module was collaboratively designed, developed and reviewed by

educators both from public and private institutions to assist you, the teacher
or facilitator in helping the learners meet the standards set by the K to 12
Curriculum while overcoming their personal, social, and economic
constraints in schooling.

This learning resource hopes to engage the learners into guided and
independent learning activities at their own pace and time. Furthermore, this
also aims to help learners acquire the needed 21st century skills while taking
into consideration their needs and circumstances.

In addition to the material in the main text, you will also see this box in the
body of the module:

Notes to the Teacher

The ability to listen is as important as the
ability to speak.” -Sheryl Sandberg

As a facilitator, you are expected to orient the learners on how to use this
module. You also need to keep track of the learners' progress while allowing
them to manage their own learning. Furthermore, you are expected to
encourage and assist the learners as they do the tasks included in the module.

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For the learner:

Welcome to the Entrepreneurship 12 Alternative Delivery Mode (ADM) Module

on Compute Profits and Projected Financial Statements!

This module was designed to provide you with fun and meaningful
opportunities for guided and independent learning at your own pace and time.
You will be enabled to process the contents of the learning resource while
being an active learner.

This module has the following parts and corresponding icons:

This will give you an idea of the skills or

What I Need to Know competencies you are expected to learn in the
module.

This part includes an activity that aims to

check what you already know about the
What I Know
lesson to take. If you get all the answers
correct (100%), you may decide to skip this
module.
This is a brief drill or review to help you link
What’s In the current lesson with the previous one.

In this portion, the new lesson will be

What’s New introduced to you in various ways; a story, a
song, a poem, a problem opener, an activity
or a situation.
This section provides a brief discussion of the
What is It lesson. This aims to help you discover and
understand new concepts and skills.

This comprises activities for independent

practice to solidify your understanding and
What’s More
skills of the topic. You may check the
answers to the exercises using the Answer
Key at the end of the module.
This includes questions or blank
What I Have Learned sentence/paragraph to be filled in to process
what you learned from the lesson.
This section provides an activity which will
What I Can Do help you transfer your new knowledge or skill
into real life situations or concerns.

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This is a task which aims to evaluate your

Assessment level of mastery in achieving the learning
competency.
In this portion, another activity will be given
Additional Activities to you to enrich your knowledge or skill of the
lesson learned.

Answer Key This contains answers to all activities in the

module.

At the end of this module you will also find:

References This is a list of all sources used in

developing this module.

The following are some reminders in using this module:

1. Use the module with care. Do not put unnecessary mark/s on any part
of the module. Use a separate sheet of paper in answering the exercises.
2. Don’t forget to answer What I Know before moving on to the other
activities included in the module.
3. Read the instruction carefully before doing each task.
4. Observe honesty and integrity in doing the tasks and checking your
answers.
5. Finish the task at hand before proceeding to the next.
6. Return this module to your teacher/facilitator once you are through
with it.
If you encounter any difficulty in answering the tasks in this module, do
not hesitate to consult your teacher or facilitator. Always bear in mind that
you are not alone.

We hope that through this material, you will experience meaningful

learning and gain deep understanding of the relevant competencies. You
can do it!

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What I Need to Know

In this module, you will know what is profit and its importance, how it is
calculated and how to record data. Profit is an essential outcome of running a
business. Often, earning a profit is the business or company's primary goal. A
positive bottom line shows that the company is healthy and performing well. Profit
is capital that companies can use for a variety of purposes like maintaining the
workplace or equipment, replacing or upgrading vehicles or other low and high-
cost items, or investing in new products, services or employees. With good profits,
businesses can expect to continue flourishing.

Learning Competencies:
Compute for profits
CODE: CS_EP11/12ENTREP-0h-j-16

Create the company’s five (5) year projected financial statements

CODE: CS_EP11/12ENTREP-0h-j

After going through the module, you are expected to:

K: compute for profits;
S: show a 5-year financial statement of a proposed business;

A: be determined in performing activities required.

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What I Know

Task 1

Direction: Write True if the statement is correct & write False if you think
the answer is not correct. Do this in your notebook.

_________1. The gross profit rate of the entrepreneurial venture is computed

by dividing the cost of goods sold by net sales.
________ 2. The gross profit rate provides information on the cost ratio of
the business.
_________ 3. In evaluating the profitability of the entrepreneurial venture,
the evaluation must focus on the information reflected on the
face of the balance sheet.
_________ 4. The operating profit margin rate indicates information on the
percentage of operating expenses on the net sales.
_________ 5. Mr. Q is a practicing Doctor of Medicine. During the month of
March 2019 he received professional fees amounting to
Php 1,000,000 and total expenses of Php 250,000. The net
income of Mr. Q is Php 750,000.
_________ 6. Profit is the money received from customer in exchange of
products given to customer.
_________ 7. The gross profit rate of the entrepreneurial venture is computed
by dividing the cost of goods sold by net sales.
_________ 8. The gross profit rate provides information on the cost ratio of
the business.
_________ 9. One of the objectives in evaluating the gross profit rate of the
business is to determine whether the amount of the gross profit
is sufficient to cover the operating expenses.
________ 10. The operating profit margin rate indicates information on the
percentage of operating expenses to net sales.
________ 11. The government is not interested in financial statements since
it is not a party to any of the transactions of the business.
________ 12. The net profit margin rate presents the general perspective of
the operating performance of the business.
________ 13. The amount of income per peso investment can be determined
by computing the net profit margin rate.
________ 14. In normal situation, it is favorable for the business to have
high inventory.
________ 15. Preparation & presentation of the financial statements of the
entity is the primary responsibility of an accountant.

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Lesson
Computing Profits and Projected
7 Financial Statements

Whether a business is a start-up or already established, business

implementation becomes the responsibility of all the employees.
Implementation is the process of executing a plan or policy so that a concept
becomes a reality. To implement a plan properly, managers should
communicate clear goals and expectations, and supply employees with the
resources needed to help the company achieve its goals.

What’s In

Task 2

Direction: Discuss briefly your insight of the quotation hereunder. Write

your explanation on your notebook.

“Running a business well means knowing when it’s time to make profit.”
- Auliq Ice
_____________________________________________
_____________________________________________
_____________________________________________

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Notes to the Teacher

The ability to listen is as important as the ability to speak.” -
Sheryl Sandberg

What’s New

Task 3

Direction: Read and understand the given problem.

Problem: Rhea is engaged in a buy-and-sell business of signature perfumes.

She buys 10 boxes of perfumes. Each box costs 12,000.00 and
contains a dozen of perfume bottles. She plans to sell one
perfume bottle at P1,500. What is her expected profit on the 10
boxes of perfumes?

Note: Getting the difference between the amount of money earned from
selling 10 boxes containing a dozen of perfume bottles and the cost of
those 10 boxes gives the profit.”

Explore!

1. How much profit does Rhea earn?

2. What do you think of Rhea’s business?
3. Is it good for a beginner? Why?
4. What do you think should Rhea do in order to flourish in her business?

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What is It

Welcome to computing PROFIT.

The simplest formula is: total revenue – total expenses = profit.

Profit is calculated by deducting direct costs, such as materials and

labor and indirect costs (also known as overheads) from sales. Under normal
accounting rules, sales and expenses are included in profit when they occur,
not when they are actually paid so profit will include credit sales and
purchases even when they are yet to be paid.

Source: https://informi.co.uk/finance/how-do-i-calculate-profit.

Why is profit important?

It is important for a business to understand how much profit they’ve

made to give it an idea as to whether the business is successful. With so much
money going in and out of a business, it is not always easy to see whether
what a small business owner is doing is actually making money. By
calculating profit, it helps give some clarity. If a business is making a profit it
can:
• expand and grow
• attract more investment
• employ more staff.

It is worth mentioning that profit is different to cash. Some things will

affect the cash flow of the business, but won’t affect profit e.g. money taken
out of the business for personal use. Likewise, some items will affect profit
but will not affect cash such as provisions e.g. where a business makes an
adjustment for a customer not paying.
https://informi.co.uk/finance/how-do-i-calculate-profit.

What Is Gross Profit?

Gross profit is the revenue a business brings in after covering the

expenses required to make a sale. Simply put, gross profit is a business’s
total sales, less the cost of goods sold.

Source: http://www.businessdictionary.com

What Is the Gross Profit Formula?

The equation for calculating gross profit is simple:

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Sales – Cost of Goods Sold = Gross Profit

To fully understand gross profit, however, you have to understand the

difference between variable and fixed expenses.
Fixed Expenses
• Fixed costs don’t change based on production. Examples of fixed
costs include:
• Rent
• Insurance
• Salaries of employees
• Payroll taxes and employee benefits
• Property taxes

Variable Expenses
On the other hand, variable expenses are costs that can change based
on how much you’re producing. Examples of variable costs include:

. Materials used
. Shipping costs
. Direct labor
. Credit card fees
. Sales staff commissions

Both fixed costs and variable costs can have a large impact on gross
profit. The more you can keep your fixed costs down and lower your variable
costs, the greater gross profit you can expect.

Cost of Goods Sold

The cost of goods sold is the price of all inventory sold which
includes both fixed and variable costs. http://www.businessdictionary.com

As is often the case, however, quite a bit of data can get buried in
the “cost of goods sold.”

This can include merchandise purchased for resale, raw materials,

labor costs, and sometimes merchant account fees. Business accountants
and bookkeepers can debate for days about what expenses actually belong in
the cost of goods sold. You can help them out by making sure your accountant
or bookkeeper has a good understanding of your business operations—you
want them to set up your chart of accounts with the appropriate costs posted
to the cost of goods sold.

How to Calculate Gross Profit Example

Let’s pretend you own a stand on the beach, and you sell snorkel sets.
The only cost associated directly with making a sale is the amount you paid
to purchase the snorkel sets you are selling to folks who come to the beach
unprepared.

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If you price your snorkel sets at 200.00 each and you sell 10 sets before
you hit the waves at noon, you will have made P2000 in sales.

200.00 per snorkel set x 10 snorkel sets sold = P2000 in sales

But you have to pay for the snorkel sets you sold.

Chances are you paid in full before your supplier shipped them to you,
but you need to replenish your stock—otherwise, you won’t have anything to
sell and your beach stand will go out of business. Let’s pretend you purchased
your snorkel sets for 85 each. The cost of the 10 snorkel sets you sold, then,
is 850.
85.00 cost per snorkel set x 10 snorkel sets purchased for resale =
850.00 in cost of goods

This means your gross profit is P1150:

P2000 in snorkel set sales – 850.00 paid to snorkel set supplier =

P1150 gross profit

This Php 1150, in turn, gets used to maintain your beach stand, advertise at
the tiki hut down the shore, etc.

Gross profit, then, is the money you have available to run your business
after paying for the goods or services that let you make the sales in the first
place. https://www.wikihow.com/Calculate-Profit
How to Calculate Gross Profit Margin
The gross profit formula can also be used to calculate your gross profit
margin. The gross profit margin is a good way to measure your business’s
production efficiency over time. Whereas gross profit is a peso amount,
the gross profit margin is a percentage.

The gross profit margin formula is:

Gross profit margin = Gross profit (Revenue – Cost of goods sold) /
Revenue

Because gross profit can rise while gross profit margins can fall, it
can be misleading to simply calculate just gross profit without considering
the gross profit margin.
Source: https://www.fundera.com/blog/how-to-find-gross-profit

Analyze the Liquidity Status of the Business Liquidity Ratios

Current ratio = Current assets / Current liabilities

Quick ratio = (Current assets – Inventories) / Current liabilities = (Cash and
equivalents + Marketable securities + Accounts receivable) /
Current liabilities

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The quick ratio measures its short-term obligations with its most liquid
assets and therefore excludes inventories from its current assets. .
Financial statements are important in a company management as a
means of communicating past successes as well as future expectations. The
financial statement records all the operating results such as sales, expenses
and profits or losses.
Return of Investment (ROI)

The Return of investment (ROI) measures the amount of net income

per peso invested to the business.http://www.businessdictionary.com
The formula to compute ROI is as follows.
Return on investments = Net income
Average total assets

The average total assets are by dividing the sum of the total assets at the
beginning and end of the period.

Balance Sheet includes spending and income that isn’t in the Profit and
Loss. For example, the money you spend to repay a loan or buy new assets
doesn’t show up in the Profit and Loss. And the money you take in as a new
loan or a new investment doesn’t show up in the Profit and Loss either. The
money you are waiting to receive from customers’ outstanding invoices shows
up in the Balance Sheet, not the Profit and Loss. The Balance Sheet shows
many reasons why profits are not cash, and why cash flow isn’t intuitive. It’s
all related to the essential principles of cash flow.

The Balance Sheet shows your financial picture – assets, liabilities, and
capital – at some specific moment. It helps to understand that the Profit and
Loss shows financial performance over a length of time, like a month, quarter,
or year. The Balance, in contrast, is a moment. Usually it’s the end of the
month, quarter, or year. Sometimes it’s the end of the business day.

Balancing is a common term associated with bookkeeping, accounting,

and finance. We “balance the books.” It’s a lot like reconciling a checkbook: if
it isn’t right down to the last penny, then it’s wrong. Assets have to equal
liabilities plus capital. Always.

A traditional Balance Sheet statement shows assets on the left side

and liabilities and capital on the right side or the bottom, as in this
illustration:

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Projected balance sheet

Table 1. source: leanplan.com

The balance sheet involves the other three of the six key financial
terms (the ones that aren’t on the Profit and Loss: Assets, Liabilities, and
Capital).

▪ Assets. Cash, accounts receivable, inventory, land, buildings, vehicles,

furniture, and other things the company owns. Assets can usually be
sold to somebody else. One definition is “anything with monetary
value that a business owns.”
▪ Liabilities. Debts, notes payable, accounts payable, amounts of money
owed to be paid back.
▪ Capital (also called equity). Ownership, stock, investment, retained
earnings. Actually there’s an iron-clad and never-broken rule of
accounting: Assets = Liabilities + Capital. That means you can
subtract liabilities from assets to calculate capital.

Although traditional printed balance sheet statements are usually arranged

horizontally, as in the illustration above, balance sheets in financial
projections are usually arranged vertically, showing the assets first, then the
liabilities, and then the capital. Here, for example, is the balance sheet for the
first few months of the bike store I mentioned earlier. It’s the balance sheet
associated with the Profit and Loss for the same company, Garrett’s bicycle
store:

Projected 4 months financial statement

Garrett’s bicycle store
Table 2 Source: Leanplan.com

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Here is another example of projected balance sheet and financial

statement for five years.

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Yearly increase in revenue is assumed at 5%

Yearly increase in cost is assumed at 5%

As a future entrepreneur, one should always remember that nothing is

permanent in the field of entrepreneurship. What is applicable to one
entrepreneur may not be applicable to another. Certain things may happen
to one entrepreneur but may not happen to another.

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Entrepreneurship should be practiced not as a science but as an art.

Creativity should always be applied to entrepreneur by regularly evaluating
the market and the environment and responding to the changes in them.

The owner of an ordinary small business has the freedom to manage

and operate. Ideally, he/she prefers business activities which are done easily.
However, the entrepreneur has to perform the entrepreneurial activities
correctly regardless of whether they are undertaken easily or not. The
important in entrepreneurship is that the business activities are performed
correctly.

http://www.smarta.com/advice/business-planning/business-
plans/how-to-makerevenue-forecasts/ Katie Jensen, “Factors Considered in
Financial Forecasting.” Chron. Hearst Newspapers. Acessed December 10,
2018.

What’s More

Task 4

Direction: Do what are asked. Accomplish this in your notebook.

1. Annie bought one dozen smartphones for Php 200,000.00 with a discount
of 5%. She sold at a price of Php 18,000.00 per unit. However, a new
model of smartphone became available in the market, so she sold the
remaining half dozen at Php 12,000.00 each unit. What was her profit or
loss? Compute the gross profit.

What I Have Learned

Task 5

Direction: In your notebook, complete the following statements.

1. I have learned that

_____________________________________________________________________
_____________________________________________________________________
2. I have realized that

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_____________________________________________________________________
_____________________________________________________________________

2. I will apply what I have learned

_____________________________________________________________________
_____________________________________________________________________

What I Can Do

Task 6

Direction: Accomplish the table to make a 5-year financial statement of a

proposed business.

Yearly increase in revenue is assumed at 10%

Yearly increase in cost is assumed at 10%

1. Assuming that you have P1,450,000 revenue that will increase10%

annually with proportionate increase of 10% of the cost P1,150,000
annually. ( note: Given figures will be fill-in in the first year round of the
business.
2. Compute the gross profit base on the given revenue and cost.
3. Provide your own name of the Business.

Projected five year income statement

___________________________
Name of the Business

Year 1 Year 2 Year 3 Year 4 Year 5

Revenue
cost
Gross
profit

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Assessment

Task 7

How did you understand the lessons that you have studied in this module?
Answer the following questions. Choose the correct answer of the given
choices.
_________1. It is the profit of the company that made after deducting the
cost.
A. Net Profit
B. Gross profit
C. Profit shares
_________2. The income generated from normal business operations and
includes discounts and deductions for returned merchandise.
A. Revenue
B. Profit
C. Sales

_________3. It shows the financial picture – assets, liabilities, and capital – at

some specific moment.
A. Income statement
B. Balance sheet
C. Projected five year forecast
_________4. It is the ratio between net profit and cost of investment.
A. Return of Investment
B. Total sales
C. Assets

_________5. Mr. Q is a practicing Doctor of Medicine. During the month of

March 2019 he received Professional Fees amounting to P
1,000,000 and total expenses of P250,000. The net income of
Mr. Q is___________
A. P 750,000
B. P 450,000
C. P 500,000
_________6. It is the money received from customer in exchange of
products given to customer.
A. Sales
B. Profit
C. shares
_________7.The price of all inventory sold which includes both fixed
and variable costs.
A. Cost of good sold
B. Total sales
C. Net sales
_________8. Anything with monetary value that a business owns.

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A. Liabilities
B. Assets
C. Expenses
_________ 9. The following are belongs to the fixed costs EXEPT ____________.
A. Rent
B. Salaries of employees
C. Material used
_________10. The simple formula in getting the profit.
A. total revenue – total expenses = profit
B. Total expenses + total revenue = profit
C. Total sales- variable cost = profit
_________11. it is one of the financial statements of a company and shows
the company’s revenues and expenses during a particular
period.
A. Balance sheet
B. Revenues
C. Income statement
_________12. The term used for the goods available for sale and raw
materials used to produce goods available for sale.
A. Net sales
B. Inventory
C. Production sales
_________13. Also called equity.
A. Capital
B. Expenses
C. liabilities

_________14. In normal situation, it is favorable for the business to have high

inventory.
A. Necessarily
B. Not necessarily
C. If it is only needed

_________15. Preparation & presentation of the financial statements of the

entity is the primary responsibility of ________________.
A. a lawyer
B. a mayor
C. an accountant

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Additional Activities

“Proper business record keeping provides the business a real advantage over
the competition in different ways.”

Give some thought of the above statement.

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Answer Key
Task 1 Task 7 /Assesment
1. F 6. F 11.F 1. B 6. A 11. C
2. T 7. F 12.T 2. A 7. A 12. B
3. F 8. T 13.F 3. B 8. B 13. A
4. F 9. F 14.T 4. A 9. C 14. B/C
5. T 10. F 15.F 5. A 10. A 15. C
Task 2- Answers may vary
Task 3
Activity Solution:
Given of 10 boxes of perfumes contain a dozen of bottles
120 bottles bought by Rhea
Cost of each box = P12,000.00
Selling Price of each perfume =P1,500.00
To solve the problem, we compute first the cost of 10 X 12=120 bottles
Since each box costs P12,000.00 & Rhea bought 10
boxes, we get
Cost = P12,000.00(10)= P120,000.00
Rhea can expect that the net sales he will get upon selling 10
boxes consisting of 120 bottles.
Net Sales = 1,500 (120) = P180, 000.00
Thus, has
Profit =Net Sales – Costs =180,000.00-120,000.00 =P60,000.00
Task 4- Answers may vary, depending on how the learners compute
in getting the profit by using the simple formula. but still subject
teachers will check the answers of the learners items a-d.
Task 5- Answers may vary
Task 6- Computations may vary but still subject teacher will do the
math in checking.
Answer Key
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References
ELECTRONIC RESOURCES
1.https://www.tutorialspoint.com/entrepreneurship_development/entrepre
neurship_devel opment Business Dictionary.
1. http://www.businessdictionary.com/defination/market-size.html
“Forecasting” Businessdictionary, Accessed December 10, 2018,
http://www.businessdictionary.com/definition/forecasting.html “How to
Make Revenue Forecasts” Smarta, Accessed December 10, 2018,
2. http://www.smarta.com/advice/business-planning/business-plans/how-
to-makerevenue-forecasts/ Katie Jensen, “Factors Considered in Financial
Forecasting.” Chron. Hearst Newspapers. Acessed December 10, 2018.
https://smallbusiness.chron.com/factorsconsidered-financial-forecasting-
80716.html
3. https://www.slcbookkeeping.com/blog/bid/207078/Bookkeeping-Tasks-
for-Every-Partof-the-year https://www.thebalancesmb.com/steps-to-
increase-small-business-profits-1200720
https://www.wikihow.com/Calculate-Profit
4. Google.com
5. Investopedia.com- Glossary items
BOOKS RESOURCES
1. Business finance by: Roberto G. Medina, 2 nd edition,Rex
Bookstore.1977,reprinted 2011.
2. Entreprenenurship by: Feliciano Fajardo, National bookstore, 1955.

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