Money and the Financial System The Functions and Characteristics of - PowerPoint PPT Presentation

Money and the Financial System

The Functions and Characteristics of Money  Medium of Exchange: Accepted as payment for products and resources  Measure of Value: Single standard for assigning and comparing values of products and resources  Store of Value: Means of retaining and accumulating wealth. Money Near Money Acceptability Cash Savings account Divisibility Cheques Money market Demand Drafts Portability account Certificate of Stability deposit Durability Credit card Debit card Difficulty to Counterfeit Traveler’s cheques

The Indian Financial System  Provides services that are essential in a modern economy  Use of a stable, widely accepted medium of exchange reduces the costs of transactions  Facilitates trade and, therefore, specialization in production  Financial assets with attractive yield, liquidity and risk characteristics encourage savings  By evaluating alternative investments and monitoring the activities of borrowers, financial intermediaries increase the efficiency of resource use  Access to a variety of financial instruments enables an economic agent to pool, price and exchange risks in the markets  The most catalyzing agent for growth of the economy, making it one of the key inputs of development Reserve Bank of India/Banking Institutions/Financial Institutions/Money and Capital Markets/Informal Financial Enterprises.

Monetary and Fiscal Policies BASIS FOR FISCAL POLICY MONETARY POLICY COMPARISON Approach and The tool used by the government The tool used by the central bank to in which it uses its tax revenue regulate the money supply in the Objectives and expenditure policies to affect economy is known as Monetary the economy is known as Fiscal Policy Policy Ministry of Finance Reserve Bank of India Administered by The fiscal policy changes every The change in monetary policy Nature year depends on the economic status of the nation Related to Government Revenue & Banks & Credit Control Expenditure Focuses on Economic Growth Economic Stability Policy Tax rates and government Interest rates and credit ratios spending Instruments

Accounting and Financial Statements

Six-Spoke Wheel of Business You are NOT Customers Who Buy Products and Services the company. Sold by the Business Employees who are Government paid wages and Agencies salaries Collect Taxes from and provided other the Business benefits Business Entity Sources of Equity Vendors of Materials, Capital Individuals Services, Supplies, and Financial Parts, Tools, Institutions who Invest Sources of Debt Equipment and money in the business Capital Bank and other Machines Bought by as owners, not creditors Financial Institutions the Business the business has to earn who Loan Money to Profit on the Capital the Business on which Invested in the Venture Interest is Paid

The Nature of Accounting  The recording, measurement, and interpretation of financial information, often used in making business decisions.  Bookkeeping is much narrower and more mechanical than accounting  Bookkeeping is typically limited to routine day-to-day business transactions and obtaining and recording information that accountants use in financial analysis Internal Uses: External Uses:    Managerial  Reporting financial performance to outsiders Accounting  Filing Income Taxes  Cash Flow  Obtaining Credit  Budget  Reporting to Stockholders

Who Uses Accounting Information? Business Activities Accounting Those with Indirect Financial Interest Those with Management Economic Other Direct Regulatory Tax Owners, partners Planners groups Financial Agencies authorities Boards of Interest Employees NITI Aayog SEBI directors and labor IT Department unions Stock Present or Officers of the potential Exchanges company Financial State Reserve Bank investors advisors Managers National and of India Customers International Present or Municipal Department and the potential heads general Other Government creditors Other public agencies planners Supervisors Actions That Affect Business Activities

The Accounting Process: The Accounting Equation Assets = Liabilities + Owners’ Equity Things A firm’s The difference of value debts and between a firm’s that a obligations assets and its firm owns liabilities

The Accounting Cycle and Statements 1. Examining Source Documents 2. Recording Transactions Double-Entry Bookkeeping 3. Posting Transactions 4. Preparing Financial Statements The Income Statement The Balance Sheet Ratios A financial report that shows A “snapshot” of an profitability over a period of time – organization’s financial position Profitability month, quarter or year. at a given moment. Asset Revenue Assets utilization Cost of Goods Sold Accounts Receivable Gross Income Liabilities Liquidity Expenses Accounts Payable Debt Selling, general & Accrued Expenses administrative utilization Owner’s Equity R&D, engineering Interest Per share Depreciation Video data Net Income

Income Statement Balance Sheet Finished Raw Cost of Work in Goods Material Goods Sold Process Cost of materials Materials used available for use Labor overheads Total manufacturing Cost of goods Cost of goods costs incurred manufactured Sold this period Ending raw Ending work in Ending finished material process Goods inventory inventory inventory

ABC Income S Statement Year ABC Bal alan ance S Sheet a t as o on Ended December 3 31, 2 2016 December 3 31, 2 2016 Assets: Current Assets: Reve venues: Cash: 17,850 Net Sal ales 123,850 Accounts Receivable 10,200 Consulting: 73,850 Merchandise Inventory 8,750 Total To al Reve venues 197,700 Total Assets: 36,800 Expenses: Property & Equipment Cost of Goods Sold 72,600 Equipment 11,050 Office Building 73,850 Selling Expenses 37,700 Total Prop. & Equip. 84,900 General al & Admin. 8,400 Total Assets: 121,700 Other expen 5,600 To Total al Expenses 134,300 Liabilities & Owner’s Equity Net Income 63,400 Current Liabilities Acct’s Payable 12,600 Total Current Liabilities 12,600 Long-term Liabilities Income/Sales = 63,400/197,700 = 32% Mortgage Payable 23,600 Sales/ Fixed Assets = 197,700/84,900 = 2.3 Total Liabilities 36,200 Owner’s Equity: Current Ratio = 36,800/12,600 = 2.9 ABC, Capital 85,500 Total Liabilities & Owner’s Equity 121,700 Debt/Equity = 23,600/85,500 = 0.3 EPS = 63,400/85,500 = 0.75

Balance Sheet Total Value of Total Value of Liabilities Assets & Shareholders' Equity Current Liabilities Current Assets Long term debt Fixed Assets 1. Tangible fixed assets Shareholders' 2. Intangible equity fixed assets

The Time Value of Money  The Interest Rate  Simple Interest  Compound Interest  Amortizing a Loan  Compounding More Than Once per Year

The Interest Rate Which would you prefer – Rs 10,000 today or Rs 10,000 in 5 years? Obviously, Rs 10,000 today. You already recognize that there is TIME VALUE TO MONEY!! Why is TIME such an important element in your decision? TIME allows you the opportunity to postpone consumption and earn INTEREST.

Types of Interest  Simple Interest Interest paid (earned) on only the original amount, or principal, borrowed (lent).  Compound Interest Interest paid (earned) on any previous interest earned, as well as on the principal borrowed (lent). SI = P 0 (i)(n) = Rs1,000(.07)(2) = Rs140 FV = P 0 + SI Rs 1,140 Future Value of a Single $1,000 Deposit Rs 1,145 20000 10% Simple = P 0 (1+i) n 15000 FV n Interest 7% Compound 10000 Interest 10% Compound 5000 The “Rule -of- 72” Interest 0 1st Year 10th 20th 30th Years to Double = 72 / i% Year Year Year

Continuous Compounding and EMI Annual Compounding: FV = $10,000 x (1 + (15% / 1)) ^ (1 x 1) = $11,500 Quarterly Compounding: FV = $10,000 x (1 + (15% / 4)) ^ (4 x 1) = $11,586.50 Monthly Compounding: FV = $10,000 x (1 + (15% / 12)) ^ (12 x 1) = $11,607.55 Continuous Compounding: FV = $10,000 x 2.7183 ^ (15% x 1) = $11,618.34 (FV) = PV x (1 + (i / n)) ^ (n x t) FV = PV x e ^ (i x t)  Car worth Rs 5.95 lakh.  Down payment of Rs 1.5 lakh  Auto loan at 12% interest per annum for four years.  EMI = [P x R x (1+R)^N]/[(1+R)^N-1],  where P stands for the loan amount or principal, R is the interest rate per month [if the interest rate per annum is 12%, then the rate of interest will be 12/(12 x 100)], and N is the number of monthly instalments. EMI = 4,45,000x0.01x(1.01)^48 [(1.01)^48 – 1] = 11,170

Current Assets and Current Liabilities  Current assets:  Current Liabilities: Financial resources that can be Short-term debt obligations that converted to cash within a year. must be paid within a year.  Cash  Accounts payable  Marketable securities  Wages payable  Accounts receivable  Taxes payable  Inventory  Notes (loans) payable Optimizing Inventory The objective is to maximize inventory investment without production cutbacks because of materials shortfalls or lost sales due to insufficient finished goods inventories. Annual requirement quantity (D) = 10,000 units Cost per order (K) = 40 Cost per unit (P)= 50 Yearly Carrying cost percentage = 10% Yearly carrying cost per unit (h) = 50 * 10% = 5