UGBA 10 Finance Module

Fiscal policies

- policies used by a government regarding how it collects and spends revenue

Finanial literacy

- Read/write/talk about finance and economics

Market Economy

individual producers and consumers control production and allocation by balancing supply and demand mediated by price

Equity prices are a function of

- expected future earnings and cash flows

- Traders' perception of risks in the market

Basic Business Financing

Companies finance their assets by issuing stockholders' equity and debt

Stockholders' equity (SE)

the insurance of common stock

- must be at least one share of stock issued by a company

- the stockholders is/are the owner(s) of the company

- Debt is borrowing by the company

Accounting Equation

Assets = Liability + Stockholders' equity

Assets

economic resources that can be useful to the company such as buildings and equipment, inventory to sell to customers, and financial assets such as cash to fund future growth and expansion

Variable costs

these costs go as you sell more

Fixed costs

these are the same however much you sell

Profit

Profit = Sales - costs

Profit = np - nv - F

Costs

Costs = fixed costs + variable costs

Contribution margin

price - fixed costs

US Economy general overview

- 2-4% annual growth

- US accounts for about 24% of world economic activity

Planned Economy

- relies on a centralized government to control all or most factors of production and to make all or most production and allocation decisions

Mixed Market Economy

compromise

Demand

the willingness and ability of buyers to purchase a product (a good or a service)

Supply

the willingness and ability of producers to offer a good or service for sale

Gross Domestic Product

the total value of all goods and services produced within a given period by a national economy through domestic factor of production

Factors of production

the resources that a country's businesses use to produce goods ad services

Balance of trade

- the economic value of all the products that country exports minus the economic value of its imported products

- positive or negative

National debt

the amount of money the government owes its creditors

Inflation

occurs when the price of goods in an economy increases

- it is measured by calculating the price of a "basket" of goods and comparing with a year ago

- US has inflation of total 153% Since 1983, an average annual rate of 2.7%

Monetary policies

- policies used by a government to control the size of its money supply

Equity Market Averages

- Dow 30: most discussed

- S&P 500: most broad based

- Nasdaq: emphasizing tech

Financial seniority

The order in which claims on the company's assets are paid if the company is liquidated

Claims

comprised of liabilities and stockholders' equity (SE)

Liquidation

is the sale of all assets for cash and the payment of the cash to the investors who hold claims

Rules of Financial Seniority

- DEBT ARE PAID FIRST

- in the event there is any cash remaining after the debt is paid, that residual amount is paid to stockholders

- liquidation only takes place when a company is n "bad shape"

What's good about being residual?

- this means the company is worth a lot

- debt or borrowing is repaid by paying back the amount borrowed

- debt is a fixed claim

- Equity gets the remaining value

- It is this upside potential that makes equity attractive as a long term investment

Secured loan (asset-backed loan)

Loan to finance an asset, backed by the borrower pledging the asset as collateral to the lender

Collateral

Asset pledged for the fulfillment of repaying a loan (抵押）

ex.

- land

- property (fixed assets)

- Accounts receivable (financial asset)

Unsecured loan

loan for which collateral is not required

Loan Principal

amount of money that is loaned and must be repaid

Interest

Periodic payments that must be made on a loan bond

Corporate bond

formal pledge obligating the issuer to pay interest periodically (usually every 6 months) and repay the principal at maturity

Bond Indenture(bond contract)

Legal document containing complete details of a bond issue

Maturity date (due date)

future date when repayment of a bond principal is due from the bond issuer (borrower)

Face Value (Par Value)

amount of money that the bond buyer (lender) will receive on the maturity date

Default

Failure of a borrower to make payment (of interest or principal) when due to a lender

Bondholders' claim

request for court enforcement of a bond's terms of payment

Angel Investors

- outside investors who provide new capital for firms in return for a share of equity ownership

- in general, "angels" tend to invest smaller sums than venture capital

Venture capital

- private funds from wealthy individuals seeking investment opportunities in new growth companies

- maybe managed by professional investors as a VC fund

Initial Public Offering (IPO)

first sale of a company's stock to the general public

Stock is valued based on future earnings expectations

- if profit margins or growth in profits is expected to be high, a company's stock will be more valuable

- dividend yield is also a contributor

Markt capitalization (market Cap)

- total dollar value of all the company's outstanding shares

= share price x number of shares outstanding

Earning per share

Net income / number of shares outstanding

Dividend

cash payment paid by company to the stockholder for each share they hold

Dividend yield

Annual Dividend paid/ stock price

Price earning (PE) ratio

Stock price / EPS

Accounting

a comprehensive system for collecting, analyzing, and communicating financial information

Bookkeeping

recording of accounting transactions, contributes to the accounting records on which the system is based, but accounting is more skilled and requiring of judgment

Who needs the accounting information?

- internal decision marker e.g. managers within a firm

- external decision makers

e.g. investors, workforce and government bodies

What they get?

- Income statement

- Balance Sheet

- Statement of Cash flows

Responsibility for the Financial Statements

- The financial statements must be prepared under the direction of the company's management

- the financial statements are the management's legal responsibility, not the accountants

Private accountant

salaried accountant hired by a business to carry out its day-to-day financial activities

Management Accountant

private accountant who provides financial services to support managers in carious business activities within a firm

Certified public accountant (CPA)

accountant licensed by the state who may offer services to the public as an independent CPA

Audit

systematic examination of a company's accounting system to determine whether its financial reports are in accordance with GAAP, including reliably representing its operations

Generally accepted accounting principles (GAAP)

- accounting guidelines that govern the content and form of financial reports

Basis of the Balance sheet

the accounting equation!!

Balance sheet

financial statement that supplies detailed information about a firm's assets, liabilities and owners' equity

Current Asset

Asset that can or will be converted into cash within a year

Liquidity

ease with which an asset can be converted into cash

Fixed Asset

asset with long-term use or value, such as land, buildings, and equipment

Depreciation

accounting method for distributing the cost of an asset over its useful life

Intangible Asset

nonphysical asset, such as a patent or trademark that has economic value in the form of expected benefit

Goodwill

- amount paid for an existing business above the value of its other assets

- a type of intangible asset

Current liability

debt that must be paid within one year

Accounts payable

current liability consisting of bills owed to suppliers

long-term liability

debt that is not due for at least one year

paid in capital

money the stockholders invested in the firm

Retained earnings

earnings retained by a firm for its use rather than paid out as dividends

Additions to equity

- new investments from stockholders increase shareholders equity as paid in capital

- income generated by the company increases shareholders equity

Deductions from equity

- payment of cash dividends decreases shareholders equity (return on investment)

- Losses by the company decrease shareholders equity

Current ratio

- current assets/current liabilities

- indicator of liquidity

- "rule of thumb" is the ratio should be greater than 2:1

Income statements (profit-and-loss statement, statement of operations)

- financial statement listing a firm's annual or quarterly revenues and expenses so that the bottom line shows the period's profit or loss

- profit is also known as income or earnings

Revenues

- funds/net assets that flow into a company from selling goods or services

- funds can be cash or accounts receivable

Expenses

costs of serving customers

Profit

earnings or income

Statement of cash flows

- financial statement describing a firm's yearly or quarterly cash receipts and cash payments

- made up of operating cash flows from earning(usually positive)

- investing cash flows to buy new assets (usually negative)

- Financing cash flows from/to the investors (varies)

When to "count" a revenue

- when goods are supplied or delivered to the customer (NOT when the customer pays)

When to count Expenses

when the expenses is used to generate value

Revenues (on income statement)

net assets that flow into a business from the sale of goods or services

Cost of goods sold (aka cost of sales or cost of revenues)

costs of the products sold by a firm during the year (paid to suppliers by Tesla for materials and parts)

Operating Expenses

costs, other than the cost of sales, incurred by Tesla in designing and marketing its car

Gross Profit

- preliminary, quick-to-calculate profit figure calculated from the firm's revenues minus its cost of revenue

Operating Income

gross profit minus operating expenses

Net income (net profit, net earnings)

gross profit minus operating expenses and income taxes

Profit margin ratio

Annual net income/annual revenues

Return on equity (ROE)

ROE = Annual net income/ stockholders' equity (in other words, for every dollar invested in equity, how many cents on the dollar does the equity investor get, per year)

ROE =

Net profit margin asset turnover financial Leverage

Why is financial leverage beneficial for a company?

- depends on the interest rate!

- a company that borrows cheaply, compared to the returns it gets, does well to increase debt

Money

object that is portable, divisible, durable, and stable, and that serves as a medium of exchange, a store of value, and a measure of worth

The functions of money

- medium of exchange

- store of value

- measure of worth

money supply

how much "money" (however defined) is in circulation

M-1

measure of the money supply that includes only the most liquid (spendable) forms of money

Currency (cash)

government-issued paper money and metal coin

check

demand deposit over instructing a bank to pay a given sum to a specified payee

Checking account (demand deposit)

bank account funds, owned by the depositor, that may be withdrawn at any time by check or cash