Page 1: Accounting and Finance Overview

• Chapter 17: Accounting

• Chapter 18: Financial Management

• Chapter 19: Stock Market

• Chapter 20: Financial Institutions

Page 3: Why Money?

• Money is used as payment for goods and services.

• Both businesses and government require money to finance their operations.

• The government controls the amount of money in circulation to promote economic growth and stability.

• Money is essential for the functioning of the economic system.

Page 4: Why Money?

• Money is necessary for the economy to function.

• Money is used instead of bartering.

• Money serves as a unit of value.

• Electronic cash and different currencies like the Euro, Japanese Yen, and British Pound exist.

• The control of the money supply affects the rise and fall of the dollar and the U.S. economy.

Page 5: Characteristics of a Good Money System

• Portability

• Stability

• Divisibility

• Scarcity

• Durability

• Recognizable/Uniqueness/Standard

Page 8: What is the Money Supply?

• The money supply includes currency and other liquid instruments in a country's economy.

• It includes cash in circulation and bank deposits that can be easily converted to cash.

• The money supply is analyzed to assess the economy's health and develop policies.

• The Federal Reserve controls the money supply by changing the flow of money to banks and adjusting interest rates.

Page 10: What is the Federal Reserve System?

• The Federal Reserve System is the U.S. central bank.

• It consists of the Federal Reserve, 12 regional reserve banks, the Federal Open Market Committee, and the Board of Governors.

• The Federal Reserve sets interest rates, maintains financial stability, and promotes consumer protection.

Page 11: The Federal Reserve System

• The Federal Reserve Act established the Federal Reserve System in 1913.

• The system includes the board of governors, board of directors, and the Federal Open Market Committee.

• The mission of the Federal Reserve Banks is to provide stable monetary policy and a safe financial system.

Page 12: The Federal Reserve System

• The Federal Reserve System is the central bank and monetary authority of the United States.

• It ensures a safe, flexible, and stable monetary and financial system.

• The Federal Open Market Committee manages the country's money supply.

Page 13: Regional Reserve Banks

• The Federal Reserve System has 12 regional Federal Banks located in different cities across the United States.

Page 16: Monetary Policy vs. Fiscal Policy

• Monetary policy is managed by a central bank and addresses interest rates and money supply.

• Fiscal policy is determined by legislation and focuses on taxation and government spending.

• Monetary policy can be expansionary or contractionary.

Page 19: Monetary Policy

• Contractionary monetary policy aims to decrease inflation by increasing interest rates and limiting the money supply.

• Expansionary monetary policy aims to stimulate business activities and decrease unemployment by increasing the money supply and lowering interest rates.

Page 20: Monetary Policy: Tools to Manage

• Reserve requirements: The amount of funds a bank holds in reserve to influence the money supply and interest rates.

• Open Market Operations: Buying or selling securities in the open market to influence the money supply and interest rates.

Page 22: Monetary Policy: Discount Rate

• The discount rate is the interest rate that the Federal Reserve charges banks for short-term loans.

• It is a key tool of monetary policy and determines the financial viability of investment projects.

Page 24: Fiscal Policy

• Fiscal policy is an additional tool used by governments, not central banks.

• The U.S. Treasury Department can create new money and implement tax policies to increase spending and spur growth.

• Fiscal and monetary tools were coordinated efforts in response to the COVID-19 pandemic.

Page 25: Fiscal Policy

• Expansionary fiscal policy is used during a recession to boost the economy through lower taxes and increased spending.

• Contractionary fiscal policy is used during an economic boom to reduce spending and increase taxes.

Page 26: Lender of Last Resort

• The lender of last resort provides emergency credit to struggling financial institutions.

• The Federal Reserve acts as the lender of last resort to banks that could significantly impact the economy.

• Some argue that this encourages moral hazard.

Page 27: Time Value of Money

• The time value of money states that a dollar today is worth more than a dollar in the future.

• This principle is used to make long-term investment decisions and assess cash flow sequences.

Page 28: American Banking System

• Depository institutions: Commercial banks, savings and loan associations/thrifts, credit unions.

• Non-depository institutions: Life insurance companies, pension funds, brokerage firms, finance companies.

Page 29: American Banking System: Depository

• Commercial banks offer basic banking services to consumers and small to midsize businesses

  • Examples: JP Morgan, Bank of America, Citibank

• Savings and Loan Associations (S&Ls) were created to provide economic opportunities to the middle-class

  • Examples: Carver, Ridgewood

• Credit unions are created, owned, and operated by their participants

  • Example: MCU

Page 30: American Banking System: Non-Depository

• Some financial institutions provide banking services but do not accept deposits

  • Examples: insurance companies, pension funds, brokerage firms, finance companies

• These institutions serve both individuals and businesses

• They can spread financial risk over a large group or provide investment services for greater returns

Page 31: Pawnshops as Non-Depository Institutions

• Pawnshops derive income from making loans and earning interest

• They make loans based on the value of items serving as collateral

• The value of collateral can be affected by the pawnshop's current inventory

Page 33: Regulation of Financial Institutions

• Federal Reserve Board conducts monetary policy and sets interest rates

• FDIC insures deposits in the event of bank failures, up to $250,000 per depositor per member firm

• FDIC covers checking and savings accounts, CDs, money market accounts, IRAs, trust accounts, but not mutual funds, annuities, life insurance policies, stocks, and bonds

• SEC regulates securities markets and protects investors

• National Credit Union Administration oversees federal credit unions

Page 36: 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act and Volcker Rule

• Dodd-Frank Act is the most far-reaching Wall Street reform in history

• It aims to prevent excessive risk-taking that led to the financial crisis

• Dodd-Frank Act targeted sectors believed to have caused the 2007-2008 financial crisis

• Institutions responsible included banks, insurance companies, investment banking firms, mortgage lenders, and credit rating agencies

• Critics argue that the law's regulatory burdens could make U.S. firms less competitive

Page 37: Blockchain

• Blockchain is a decentralized, distributed, and public digital ledger

• It is known for its role in maintaining secure and decentralized transaction records, particularly in cryptocurrencies like Bitcoin

• Blockchain guarantees the fidelity and security of data records without the need for a trusted third party

Page 40: Securities Markets

• Securities markets attract new capital, transfer financial assets, determine prices, and facilitate short and long-term investments

• Participants include brokerages, broker-dealers, investment managers, speculators, clearing houses, venture capitalists, and securities depositories

Page 41: Primary Market

• Companies obtain funding by selling new stocks or bonds in the primary market

• Selling to investors is underwriting, and it facilitates economic capital formation

Page 42: Secondary Market

• Previously issued securities are bought and sold from other investors

• Secondary markets provide alternative uses for existing products and have a secondary customer base

• Examples of secondary markets for stocks include the New York Stock Exchange, Nasdaq, and the American Stock Exchange

Page 43: Debt vs. Equity Financing

• Bonds are debt instruments that must be repaid on maturity date, while stocks represent ownership in a company

• Debt financing raises money by selling debt instruments like bonds, bills, or notes

• Equity financing is used when companies need cash and involves selling stock to investors

Page 45: Stocks

• Common stock represents ownership in a company and a claim on profits

• Preferred stock guarantees a fixed dividend forever and has a claim on company assets

• Common stockholders have voting rights, while preferred stockholders do not

Page 46: Stock Splits and Buying Stock on Margin

• Stock splits occur when companies issue multiple shares per each outstanding share to reduce per-share prices

• Buying stock on margin involves borrowing a portion of the purchase cost from a brokerage firm

Page 47: Stock Quotes

• Stock quotes include information such as the % change in YTD price, high/low price, company name and stock symbol, last dividend per share, dividend yield, P/E ratio, number of shares traded, closing price, and net change in price

Page 48:

• Stock symbols and financial data are displayed

• Information includes the name, price, change, volume, market cap, and other details of various stocks

• Examples of stocks mentioned: TSLA, AAPL, SNAP, AMD, AMZN, AI, LUMN, F, NVDA, NIO, VALE, INTC, SWN, ITUB, META, CCL, BBIO, RIVN, GOOGL, BAC, PLTR, SOFI, AMC, PCG, ABEV

Page 49:

• Definition of a bond as a corporate certificate indicating that an investor has lent money to a firm or government

• Obligation of the organization issuing bonds to make regular interest payments and repay the principal amount

• Difference between debenture bonds (not backed by specific collateral) and secured bonds (backed by collateral)

Page 50:

• Various entities that can issue bonds: Federal, State, & Local Governments, Federal Government Agencies, Corporations, Foreign Governments & Corporations

Page 51:

• New York City sells bonds to finance infrastructure projects such as roads, bridges, schools, and water supply

• Bonds can also be issued to refinance outstanding bonds for interest savings

• Responsibility for issuing bonds shared by the Comptroller and the Mayor

Page 52:

• Types of bonds in the bond market: U.S. government bond, Treasury bill (T-bill), Treasury note, Treasury bond, Municipal bond, Yankee bond

• Each type of bond has different maturity periods and denominations

Page 53:

• Bond ratings organizations assess the creditworthiness of corporations' bond issues

• Examples of bond rating agencies: Moody's, Standard & Poor's, Fitch Ratings

• Different bond ratings indicate different levels of creditworthiness, ranging from highest quality to lowest grade

Page 54:

• Mutual Funds: funds that buy stocks, bonds, and other investments and sell shares to the public

  • Range from conservative funds to those that invest in specific sectors or mix stocks and bonds

• Exchange Traded Funds (ETFs): resemble stocks and mutual funds, traded more like individual stocks

Page 55:

• Vanguard, Fidelity, T.RowePrice: examples of mutual fund and ETF providers

Page 56:

• Quick overview of degree of investment expected:

  • Bonds: low risk, little income

  • Preferred stock: medium risk, steady income

  • Common stock: high risk, variable income

  • Mutual funds and ETFs: medium risk, variable income

Page 57:

• Bull market: stock prices rise by 20% after two declines of 20%

• Bear market: prices decline by more than 20%

Page 58:

• Bear markets: accompanied by negative investor sentiment, declining economic prospects, and risk aversion

• Bull markets: characterized by optimism, investor confidence, and expectations of continued strong results

Page 59:

• 2008 Financial Crisis: refers to the financial crisis that occurred in 2008

• Bailouts and perverse incentives: related to the actions taken during the crisis

• Link to a YouTube video about the financial crisis

Page 60:

• Chapter 17/18: Accounting and Financial Information

Page 61:

• Financial Management: involves planning, budgeting, obtaining funds, controlling and collecting funds, auditing, money management, and advising

• What do Financial Managers Do?

Page 62:

• Financial Planning: includes long-term and short-term forecasting, new product development, replacing capital expenditures, mergers and acquisitions, new market expansion, and building new facilities

• Where does the money go?

Page 63:

• Long-term uses of money: new product development, replacing capital expenditures, mergers and acquisitions, new market expansion, building new facilities

• Short-term uses of money: operations/monthly expenses, unanticipated emergencies, cash-flow problems, expanding current inventory, temporary promotional programs

Page 64:

• Accounting: the process of recording financial transactions, summarizing, analyzing, and reporting them to oversight agencies, regulators, and tax collection entities

Page 65:

• Accounting methods: cash accounting (revenues and expenses recorded when received and paid) vs. accrual accounting (revenues and expenses recorded when they occur)

Page 66:

• Accountants: work for public companies, private businesses, and government agencies, involved in recording and crunching numbers, managing company investments, risk management, budgeting, planning, strategizing, and decision-making

Page 67:

• U.S. Generally Accepted Accounting Principles (GAAP): accounting standards used in the United States

• International Financial Reporting Standards (IFRS): global standard developed by the International Accounting Standards Board (IASB)

Page 68:

• The Big 4 Accounting Firms: PricewaterhouseCoopers, Deloitte, Ernst & Young, KPMG

Page 69:

• "Cooking the books": refers to fraudulent accounting practices

• Examples of cooking the books: early recognition of revenue, late recognition of expense, inadequate reserves for bad debts, changing inventory valuation methods, phony transactions with partnerships

Page 70:

• Lehman Brothers Collapse in 2008: refers to the collapse of Lehman Brothers during the 2008 financial crisis

• Link to a YouTube video about the collapse

Page 71:

• Financial Statements

Page 72:

• Financial Process: inputs (accounting documents, receipts, payroll records, purchasing records, entertainment costs, bank statements), processing (recording entries as journal entries and posting into ledgers), outputs (financial statements such as income statement, balance sheet, statement of cash flows)

Page 73:

• Financial statements provide information about a company's financial health, performance, operations, and cash flow

• The three main financial statements are the cash flow statement, income statement, and balance sheet

Page 74:

• Balance Sheet: a financial statement that reports a company's assets, liabilities, and shareholder equity at a specific point in time

Page 75:

• Balance sheet provides a snapshot of a company's finances (assets, liabilities, and shareholder equity) as of the publication date

• Assets = liabilities + shareholder equity

Page 76:

• Example Company Balance Sheet: provides an example of a balance sheet with various assets, liabilities, and shareholder equity

Page 77:

• Income Statement: a financial statement that reports a company's revenue, expenses, gains, and losses during a specific period

Page 78:

• Income statement focuses on the revenue, expenses, gains, and losses of a company during a particular period

• Also known as profit and loss (P&L) statement or statement of revenue and expense

Page 79:

• Sample Products Co. Income Statement: provides an example of an income statement with sales, cost of goods sold, gross profit, operating expenses, operating income, non-operating items, and net income

Page 80:

• Cash Flow Statement: a financial statement that aggregates a company's cash inflows and outflows from operations, investing, and financing over a set period of time

Page 81:

• Cash flow statement includes cash flow from operations, investment, and financing

Page 82: Cash Flow Statement Company XYZ FY Ended 31 Dec 2017

• Cash Flow From Operations

  • Net Earnings: $2,000,000

  • Additions to Cash

    • Depreciations: $10,000

    • Decrease in Accounts Receivable: $15,000

    • Increase in Accounts Payable: $15,000

    • Increase in Taxes Payable: $2,000

  • Subtractions From Cash

    • Increase in Inventory: ($30,000)

  • Net Cash From Operations: $2,012,000

• Cash Flow From Investing

  • Equipment: ($500,000)

• Cash Flow From Financing

  • Notes Payable: $10,000

• Cash Flow for FY Ended 21 Dec 2017: $1,522,000

Page 83: LINKING THE 3 STATEMENTS

• Financial Statement Linkages

• Income Statement

• Cash Flow Statement

• Balance Sheet

• Year 0

• Year 1

• Revenue: $100 (Year 0), $125 (Year 1)

• Net Income: $15 (Year 0), $21 (Year 1)

• Cash & Equivalents: $110 (Year 0), $176 (Year 1)

• COGS: ($45) (Year 0), ($50) (Year 1)

• D&A: $10 (Year 0), $15 (Year 1)

• Accounts Receivable: $40 (Year 0), $50 (Year 1)

• Gross Profit: $55 (Year 0), $75 (Year 1)

• Increase in NWC: ($5) (Year 0), ($5) (Year 1)

• PP&E: $100 (Year 0), $110 (Year 1)

• OpEx: ($20) (Year 0), ($25) (Year 1)

• Cash from Operations: $20 (Year 0), $31 (Year 1)

• Total Assets: $250 (Year 0), $336 (Year 1)

• EBIT: $25 (Year 0), $35 (Year 1)

• CapEx: ($20) (Year 0), ($25) (Year 1)

• Accounts Payable: $35 (Year 0), $40 (Year 1)

• Interest Expense: ($4) (Year 0), ($5) (Year 1)

• Cash from Investing: ($20) (Year 0), ($25) (Year 1)

• Long-Term Debt: $50 (Year 0), $110 (Year 1)

• Pre-Tax Income: $21 (Year 0), $30 (Year 1)

• Taxes: ($6) (Year 0), ($9) (Year 1)

• Debt Issuances: $50 (Year 0), $60 (Year 1)

• Cash from Financing: $50 (Year 0), $60 (Year 1)

• Common Stock & APIC: $150 (Year 0), $150 (Year 1)

• Retained Earnings: $15 (Year 0), $36 (Year 1)

• Beginning Cash: $60 (Year 0), $110 (Year 1)

• Net Change in Cash: $50 (Year 0), $66 (Year 1)

• Ending Cash: $110 (Year 0), $176 (Year 1)

• Total Equity: $165 (Year 0), $186 (Year 1)

Page 84: FINANCIAL RATIOS

• PROFITABILITY RATIOS

• LEVERAGE RATIOS

• LIQUIDITY EFFICIENCY RATIOS

Page 85: Financial Ratios

• Liquidity Ratios

  • Current Ratio: Current Assets / Current Liabilities

  • Cash Ratio: Cash + Marketable Securities / Current Liabilities

• Asset Turnover Ratios

  • Receivables Turnover: Annual Credit Sales / Accounts Receivable

  • Inventory Turnover: Cost of Goods Sold / Average Inventory

• Financial Leverage Ratios

  • Debt Ratio: Total Debt / Total Assets

  • Debt-to-Equity Ratio: Total Debt / Total Equity

• Profitability Ratios

  • Return on Assets: Net Income / Total Assets

  • Gross Profit Margin: Gross Profit / Sales

• Dividend Policy Ratios

  • Payout Ratio: Dividends per Share / Earnings per Share

  • Dividend Yield: Dividends per Share / Share Price

Page 86: PRO TIP! HOW TO READ AN ANNUAL REPORT

• Read management's discussion of changes in operations

• Review the firm's consolidated balance sheet

• Analyze the Income Statement

• Review the statement of changes in cash flows

• Review auditor's opinion