Finance & Accounting U N I T 2 Functions of Money What Is Money? Barter system A system of exchange in which goods or services are traded directly for other goods or services What Is Money? Money Anything a society uses to purchase products, services, or resources Why do we like to use money instead of bartering? Important Characteristics of Money (5) Divisibility Divisible into smaller units to accommodated small purchase as well as large ones. Important Characteristics of Money (5) Portability Money must be small enough and light enough to be carried easily Paper currency is issued in larger denominations Important Characteristics of Money (5) Stability Retain its value over time 1990s: Russian farmers traded farm products for cigarettes due instability of Russian Rubles Important Characteristics of Money (5) Durability Strong enough to last through reasonable usage What is US money made of? 25% linen 75% cotton Red & Blue synthetic fibers throughout Important Characteristics of Money (5) Difficulty of counterfeiting If easy to imitate, citizens would be uneasy about accepting it as payment Special paper and watermarks, and prints intricate designs on their currency Important Characteristics of Money (5) Characteristics of Money 2.1 Characteristics of Money We learned that US money has five (5) characteristics: divisibility, portability, stability, durability and difficult to counterfeit. Compare US currency to that of a foreign country to see how the US measures up. Be sure to use visuals to showcase the differences. Save as: Last Name 2.1 Banks & other Financial Institutions The Federal Reserve System (Fed) A system set up by the federal gov’t to supervise and regulate member banks and to help banks serve the public efficiently Serves as the bank for the US Gov’t The Federal Reserve System (Fed) Serves the economy in several ways: 1. Reserves Banks cannot lend all of the money they receive from customers $1,000 savings * 15% reserve = $850 available to loan The Federal Reserve System (Fed) Serves the economy in several ways: 2. Clearing The process of paying checks and other payments among different banks The Federal Reserve System (Fed) The Federal Reserve System (Fed) Other Fed responsibilities Serving as the U.S. government bank Clearing checks and electronic transfers of funds between banks Inspection and replacement of worn and unfit currency Selective credit controls Truth-in-Lending Act enforcement Stock purchase margin requirements Careers in Banking The 6 largest banks in the U.S. employ approx. 955,000 people Commercial Revenues (in Number of Rank Bank billions) Employees Bank of 1 America $111.39 203,425 JP Morgan 2 Chase $102.69 176,000 3 Citigroup $86.60 299,000 4 Wells Fargo $85.21 160,000 5 AIG $77.30 86,000 6 Goldman Sachs $45.17 30,335 The American Banking Industry Commercial bank A profit-making organization that accepts deposits, makes loans, and provides related services to its customers The American Banking Industry Commercial banks National bank: A commercial bank chartered by the U.S. Comptroller of the Currency State bank: A commercial bank chartered by the banking authorities in the state in which it operates Services Offered There are four basic types of banking services you will use: 1. Savings accounts 2. Checking & payment accounts 3. Loans and other credit plans 4. Other services, such as safe-deposit boxes and investment advise Research one (1) bank Investigate these services of the 2 banks 1. Savings accounts 2. Checking & payment accounts 3. Loans and other credit plans 4. Other services, such as safe-deposit boxes and investment advise Pros & Cons of each service Complete comparison between banks Personal Investment Plan Finance WHAT IS IT? Finance is… Designed to help individuals, companies and the government achieve their financial (money) goals. So… What are your future money goals? Questions to consider when establishing goals What financial goals do you want to achieve? How much money will you need, and when? What will you use the money for? Are you willing to make the necessary sacrifices to ensure that your investment goals are met? Finance is… The management, creating and study of money. Three categories Public Corporate Personal Public Finance Concerned with the role of Gov’t in the economy Examples Fiscal Policy Taxes, budgets, revenue, spending Monetary Policy Money supply, interest rates, banks Trade Policy Tariffs, trade creation Corporate Finance Deals with money decisions that business make, and the analysis/tools used to make those decisions Examples Managerial Finance Financial Accounting Mergers & Acquisitions Personal Finance Financial decisions made by a person/family to obtain, budget, save and spend money Examples Financial Adviser Investment income Financial Planner Provides personal budgeting services Stockbroker Buys/sells shares for retail and institutional clients Developing an Financial Plan Personal investment The use of your personal funds to earn a financial return Developing an Financial Plan A financial plan A report that summarizes your current financial condition, recognizes your financial needs, and sets direction for your future financial activities Developing an Financial Plan Financial planner An individual who has studied and passed exams on various topics Investments Insurance Real Estate Estate Planning How Securities Are Bought and Sold Securities are usually exchanged with the help of an account executive or stockbroker How Securities Are Bought and Sold The role of an account executive An individual, sometimes called a stockbroker or registered representative, who buys and sells securities for clients Securities The primary market A market in which an investor purchases financial securities (via an investment bank) directly from the issuer of those securities Securities The secondary market A market for existing financial securities that are traded between investors Securities Securities exchange—a marketplace where member brokers meet to buy and sell securities New York Stock Exchange (NYSE), American Stock Exchange, regional exchanges, foreign exchanges Asset Allocation, The Time Factor, And Your Age Asset allocation—the process of spreading your money among several different types of investments to lessen risk Asset Allocation, The Time Factor, And Your Age The time factor—investing for the long term or the short term Known as: The Time-Value of Money Asset Allocation, The Time Factor, And Your Age The Time-Value of Money Money available at the present time is worth more than the same amount in the future due to its potential earning capacity Asset Allocation, The Time Factor, And Your Age Age—growth-oriented investments versus conservative investments Investment Opportunities Bank accounts Advantages—bank accounts are safe (low risk) and have definite rates of return Disadvantage—low risk means low investment returns Investment Opportunities Corporate bonds Primarily a long-term, income-producing investment with a value that fluctuates with market interest rates and the financial condition of the issuer Investment Opportunities Government bonds Considered risk free; pay low interest Treasury bills—sold in minimum units of $1,000; short maturities Treasury notes—issued in $1,000 units with maturity of 1 to 10 years Treasury bonds—issued in minimum units of $1,000 with maturities from 10 to 30 years Savings bonds—(EE bonds) purchased for ½ their maturity value Municipal bonds—issued by a state or local government; may be exempt from federal taxes Investment Opportunities Stocks (or shares) An investment in which you buy a portion of a company The more shares you own, the more of the company you own Investment Opportunities Common stock Stock splits A division of each outstanding share of a corporation’s stock into a greater number of shares Reduces the stock price to a price range that management feels is attractive for the stock Investment Opportunities Mutual funds A professionally managed investment vehicle that combines and invests the funds of many individual investors Accounting Process Why is Accounting Important? Helps to audit a firms financial situation. An examination of a company’s financial statements and accounting practices An audit does not guarantee that a company has not “cooked” the books Why Accounting Information Is Important Generally accepted accounting principles (GAAP)—an accepted set of guidelines and practices for companies reporting financial information and for the accounting profession What is Accounting? Accounting The process of collecting, analyzing, and reporting financial information The Accounting Process The accounting equation Assets = Liabilities + Owners’ equity The Accounting Process Assets the resources that a business owns (e.g., cash, inventory, equipment, and real estate) Liabilities the firm’s debts The Accounting Process Owners’ equity (Capital) the difference between assets and liabilities (what would be left for the owners if the firm’s assets were sold and the money used to pay off its liabilities) The Accounting Process Owner’s Equity consists of… Revenue Income a business receives from normal business activities Expenses A business’s outflow of cash to another business The Accounting Process Double-entry bookkeeping system Each financial transaction is recorded as two separate accounting entries to maintain the balance of the accounting equation General Journal General Journal Page Doc. Post Date Account Title