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Finance and accountingfor developers
Nelu Suciu
•Summary
What is finance?Definition and concepts
The value of timeAdd a second line of text here
Building up a businessFinancial accounting
Risk and hedgingAdd a second line of text here
25’
5’
15’
5’
10’
InterestConsumption vs Investment
A win / win proposition•Catch 22
You will write code to model what you have
learned
I will teach finance
I accept the agreement
The flow of money in economic ecosystem•Finance defined
ManufactureMerchandise
Services Financial
People
Government
$€£¥
Companies
Income
• The system that includes the circulation of money, the granting of credit, the making of investments, and the provision of banking facilities.
Merriam-Webster definitionFinance
• Income() -> {Consumption, Savings -> Investment}• Buy shares() -> Price appreciation, Earn dividends• Lend money() -> Earn interest• Buy commodities() -> Price appreciation
• Real estate -> rent• Gold• Oil
•The power of people
• Investment lifecycle
CLIENTMANDATE
INVESTMENTPLANNING
ACQUISITION
MAXIMIZE RETURNS WITHIN RISK BUDGET
PERFORMANCE REVIEW
CLIENT REPORTING
• Need money to run daily activities • Earn money from taxes• Finance activities by loaning money-> bonds
•Government always pays up debt • => risk free • => benchmark
Only death and taxes are certain•Government
• Financing• Sell shares (capital)• Loan money (liabilities)
• Run operations => Sell products and services on the market• Buy equipment• Labor• Supplies• Working capital
• Revenue• Pay dividends: utility companies• Re-invest: technology companies -> GROWTH
The engine of growth•Companies create value
Inventory
Compound interest•The value of time
Present Value Future ValueInterest Rate
FV1 = (PV + PVx r%) = PV(1+r%)FV2 = FV1 + FV1 x r% = PV (1 + r%) + PV(1 + PV x r%) x r% =PV(1 + r%)(1+r%) = PV(1+r%)2
FVn = PV(1+r%)n or PV = FV / (1+r%)n
• 1930 Irving Fisher -> time preference• Do I want to consume now, or I want to wait for later.
• The eagerness to consume now regulates the interest rate!
• Interest rate = the cost of money
• Loan: contract lender and borrower (amount, rate, duration, payments)
• http://www.econlib.org/library/YPDBooks/Fisher/fshToI.html
•The theory of interest
• It all boils down to a contract
Issuer Holder
Contract
Rights
Obligations
Obligations
Rigths
Give \ Receive Now Future
Now Spot Investment, Deposit
Future Financing, Loan Derivatives
•Timelines
Tom loved to play basketball. He wants to start his own business.T-Shirts for casual players like himself, not for players on a team
Poll: Friends would buy a t-shirt with a “no-look” pass on it.
1. Buy simple t-shirts.2. Print something nice on it (adding value).3. Sell the personalized t-shirt.
•Tom Philips – t-shirt business
Assets(cash)
LiabilitiesPayable
Liabilities Inventory
Capitalstock
Revenue expenses
Dividends Note
$5.000 $5.000 Tom’s own money (capital)
$500 $500 Loan from mom (capital)
($400) $400 Purchase 100 T-Shirts ($4)
($50) ($50) Advertising
$900 ($360) $900($360)
Sells 90 T-Shirts ($10)
($505) ($500) ($5) Repays loan and interest
($100) ($100) Dividend
$5.345 $0 $40 $5.000 $485 (@100) Bottom line
Balance sheet•Building up a business
• Income statement – lists the revenues and expenses for the period
• Balance sheet – a summary of assets and liabilities
• Statement of changes in shareholders equity • Statement of cash flow – shows how changes in balance sheet
are reflected in cash
•Financial statements
• Government – risk free (always paid back on time)
• Companies – uncertainty that money are paid back • Market risk -> cannot sell (price, competition, no need)• Operational risk -> cannot deliver (lack of resources)• Strategy risk -> cannot sustain (keep up with competition)
• Market risk – volatility (fluctuation in value)• Interest rates (inflation)• Foreign currency• Price volatility
•Risk and hedging
• Diversification, diversification, diversification • – 30 stocks is the magic number
• Insurance: derivatives• Interest rate swap• Options
Hedging = risk mitigation in finance•Risk hedging
• Pick any subject presented• Write code• Create a model (UML, DB, GUI)• Write user stories• Write test cases
• Want to learn more: • https://class.coursera.org/introfinance-2012-001/class/index• Financial Accounting, Pennsylvania State University Edition
•Don’t forget your homework
What’s next?• Financial Markets