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