Actg Test 1 Notes

Accounting 151G - 1

Lecture 1

Introduction to the course!You as individuals all form part of the university - nothing operates in isolation of everything else. !Price of gold?: Why do values change over time? • there has been some sort of disruption in the Ukraine; the market has a response to risk

- risk relates to value - there is a community that has seen more risk, and what happens when we have risk, we want to feel more safe.

And when we become more safe we look at the different financial instruments that we might use to hold our wealth. And therefore we see that the price of gold went UP - the global market thus, of which we all are a part, responded - we wanted safety and so share investments were

sold down, and gold was bought. Gold thus increased in price - but then we have a turn of events - Russia’s not going to involve itself with Ukrainian politics:

- this is information that made the market realise the war/annexation wasn’t going to happen - things turn safe again.

- and thus, people have a tendency to want more risk. Therefore they sold back the gold and bought back financial instruments such as shares. !

Take on board that nothing happens in isolation. Everything is relative right throughout the world. !Journalism is such that it is for the purpose of selling newspapers - not for the purpose of enlightening the population. The newspaper however, is designed to be made available to those with a ~12 year old reading age. However, the business press is one vehicle commended to see the things that we’re going to see here over the next two weeks; things happening in the market place right now. There is interactions between individuals, communities, and companies. !Saving: How do we save? - Don’t spend - When you think about spending, think about value. Are you getting value for what you’re spending? - Ask for a discount when buying something. Very few people do. Never be afraid of asking for a discount. There is

only two possible outcomes: ‘no’, or ‘uhh’. - ‘uhh’ - the element of confusion - this is when you ATTACK. - Think about what happens in business: do you think they take the price of whatever products they need at face

value? NO. That’s not how business works. You don’t have to pay the price that’s on the tag. - You want VALUE - It may be the price that’s on the card, but what is the price to you? - What do you consider to be your non-spend

- every dollar you don’t give to someone else is a dollar for you - this is the concentration of saving !“There are no free lunches” - somebody always pays. - even though you go to a function that, e.g. the university may throw with ‘free sausage sizzle’ - the minute you see

the word free, cross it out. Somebody always pays - YOU - you pay the fees; you pay for those sausages. You pay for lies !

Your life is no different to a business. What we learn today might not be necessarily appropriate in a year or two’s time. Things are always changing. e.g. now we have online shopping. Items thus come from overseas: no GST paid. Therefore, as the government doesn’t get GST - their revenue drops. And so the government changes its spending. The government must watch their spending, as they don’t have the same revenue stream as before. Furthermore, they can increase taxes - e.g. income tax. Out of your income stream is deducted tax. !Be flexible but resilient - be strong. When you go into a shop, be committed and resilient. !Theantay Keo

Accounting 151G - 1

Discipline of spending: - be focused before shopping - don’t be led astray by promotions or specials - be wary of these. There is the adage “if it looks too good to be true,

then it is”. There are various scams going on around the world; be careful. !Don’t waste time. Time has a value. !You want to be better off in the future than you currently are today - this relates to wealth creation. How can you go about achieving this? - looking at all the things you own, and take away all that you owe, some people may have a deficit. - some of this debt though, is incurred in enquiring knowledge and the benefit of that will accrue in the future - you

will increase your earning power than, say, someone who doesn’t have college eduction. Or you may be employed as you have a degree over someone who lacks it. !

Think long term - but the long term is made up of a lot of short terms. Every hour is made up of individual minutes. etc !“Good” and “bad” is NOT a part of our language - everything is relative. One persons’ good/bad doesn’t match another’s.

- therefore what we have is either; acceptable, or unacceptable - it will either increase our wealth in the future, or it will not !

You will have the seeds of what you do in a particular situation, and how you go about the process is important. What questions do you need to ask? What is it that will enable you to say, you accept/reject ‘that’ !By large, you always come back to VALUE - how do you deliver a value quotient? !Be wealth accretive - make no apologies for wanting to be better off in the future than today. In your working lifetime, it is predicted that there will no longer be a pension. !Some years ago; Warehouse introduced some new inventory system. This malfunctioned; ended up reordering a shit load of stuff. Bad news - therefore share price dropped. However, all the ships arrived; and the Warehouse had a sale for all the excess stock - sales increased. Profits increased. Good news = share price rises. !!Share price: - is a function of

- a company’s prospects - its profitability - good news !

What we do know is that the market is efficient - and the market (everybody here - anyone who might be an investor) responds to various stimuli and it’s all about news. Good news = share price expected to rise. Bad news = share price to fall. Example: Warehouse - bad news - share price dropping !Globally, retailing has been difficult. The global financial crisis has flown right through into people’s spending behaviour, and so spending behaviour at retail has changed and what we’ve seen with the warehouse is that its a country that’s reinventing itself (i.e. becoming more related to branded products). !!!!!Theantay Keo

Accounting 151G - 2

Lecture 2 Think expansively. e.g. Think globally. Financial literacy isn’t just about Auckland, or New Zealand - it’s about the world. Where you fit in the world, and how the world could impact on you and your decision making. !Risk - keeps coming back to us. - What is risk? How do we manage it? !Value judgements - we don’t understand good or bad; only if it is “acceptable” or “not acceptable”. Good and bad is all relative. !Value is different things for different people - we don’t come up with a value of one thing; value changes over time. You must therefore remain flexible. There is no end to anything. You might think that when you graduate; education ends. But it is merely the beginning of something else; therefore, always, when thinking about an end - think of a new beginning. wtf is he some motivational speaker or some shit???? !Considering news events: - already today there is some new news regarding the share price of the Warehouse !When things occur within a company that might impact on its valuation then there are rules of the stock exchange called continuous disclosure. - in other words, its incumbent for the companies themselves to keep the markets informed of anything that might

happen. - Raycon decided to sell part of its operation in China to another company - this would ordinarily be information that

the market needs to know about - some part of its operation has been sold off. However, they took the view that the purchaser had not paid the deposit and thus they didn’t feel that the stock exchange (and therefore the market) therefore be informed of this sale. The stock exchange reprimanded them severely as it is the event that matters; not when it is completed. There is an intention to do something. - and this is new information for existing investors or potential ones, to inform them of their decisions about

whether or not they want to continue to hold an investment !All of the things that we do are going to be available and be seen in the market - we’re going to do things about the individual. !It’s like your life is never done - everything in life changes. Business is exactly the same. Things do change - businesses change, e.g. from retail to online shopping. We can look at sports people who, at the top of their game, play for their countries; but when they get too old they need to reinvent themselves. - companies are the same. We’re going to concentrate on the individuals, on YOU as people - when you go out into the business world though, you’re going to apply the same principals as you would as an

individual - YOU want to be better off at the end of a period than when you were at the beginning - exactly the same as

companies; companies want to be better off. - The philosophy and mentality is exactly the same - how do we get there? what do we have to do to be better off?

- “the easiest way to save is to not spend” - we shall look and see what companies do when profits are starting to get a bit tight - the firs thing they’ll do is

cut costs. - This may not necessarily be the most appropriate way of generate bottom-line, but often times it is. - Ask the question: if you can cut the costs now, why didn’t you do it before? - is expenditure an outlay that could have been curtailed earlier?

- easiest way to save = don’t spend. !Your horizon continues to develop a little further out: - you get information - you make decisions - you take a different direction in life; the same way companies do - and therefore your horizon changes

Page � of �3 36Theantay Keo

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Process of Financial Planning!!First involves defining financial goals

- where is it you want to be in the future? - not talking about a time frame yet - just where would you like to be? - the concept of saving and pension plans (superannuation) - they are a necessary ingredient in developing your

future financial plans. (you want to be better off in the future than in the present) - however, do not rely solely on the pension !

Next involves developing plans to reach said goals Having developed the plans (you know where you want to be - you’ve clearly defined your financial goals); how will you get there? !You need to get a job, it’s necessary - in order to achieve financial independence in the future. - what sort of job/work? how long will it be around? do you need additionally studies to move up the ladder/gain more

flexibility/have greater opportunities? !Next, you have to put some numbers to it. Currently, you have a conceptual idea of where you want to be, and you have a conceptual process of how to get there. And what we certainly need now is “what are the dollars”. We must now refine this process to include things such as “what do I spend money on”. • Efficiency with money is an important thing for us to consider in putting together the final plan in monetary terms -

i.e. in dollars. !In formulating the plans and process; and putting dollars attached to the process. - it is this process and the “ingredients” going in that are important. - You’ve defined your goals; what you want, where you want to be, etc - and the process of getting there. - But it doesn’t stop there - it never arrives - life changes - we take on a different direction, and therefore we might get a bit older, become a little wiser, and so

you may want to lift your horizon - elevate your goals - aim higher - but the process remains the same. You just change the “ingredients” (i.e. your goals and plans). !

Evaluate results - then of course, from time to time, evaluate your own performance. You compare what your goals were - what you

wanted to do/where you wanted to be, with where you actually are/what you’re doing. - You’re now making comparisons against achievements against what your goals were - it is an ongoing process- it doesn’t stay constant. - It is a dynamic event (as is business) !!What causes exchange rates to change? - there is a relationship between exchange rates and interest rates. - Reserve Bank: prints money and are responsible, through legislation, to control inflation. - when interest rates rise, other countries/people in other countries find this an attractive investment opportunity, so

they buy New Zealand dollars, and invest it in some sorts of financial instruments, in order to take the benefit of higher interest rates. !

Assets are all of the things we OWN Liabilities are all of the things we OWE

• student loans are liabilities !A house - asset vs liability.

• A house can be a liability of it has debts/loans attached to it. Furthermore, it is an obligation: you must maintain it and this costs money.

“A dollar today ≠ a dollar in the future” - time is money - time has value - don’t waste time.


Accounting 151G - 3

Module 1!!Share Price - The share price is a function of a companies’ prospects, profitability - it is a function of “good” news. - the market is efficient, and the market (everybody who is a potential investor) responds to various stimuli - and it is

all concerning news. - good news = share price rise - bad news = share price falls !

the warehouse is performing badly - why? - Globally, retailing has been difficult. Spending behaviour concerning retail has changed. The Warehouse is currently reinventing itself - becoming more associated with branded products. And the Warehouse has purchased Diner’s Club (credit card). We have yet to know the true purpose behind the purchasing of diner’s club - more revenue for the warehouse? or will it be a stand-alone. !Where do the banks make their money? - depositors put money in at an interest rate of 2-3% and - lend it out at 8-9%

- getting the difference between their borrowing cost and lending rate would give the profits; - seems straightforward in how they make a profit. !

• however, when there is a downturn in the economy people stop borrowing. - housing starts to shed some price value or - the turnover in housing starts to decline - people feel safer sticking to a lower value home/suburb

- and thus, bank profits would be expected to see lower profits due to decreased borrowing - however, it is not as evident when we look at the results of banks, so where do they ACTUALLY make their

money? - we will touch on interest rates and the value of currency (currency dealers?) - John Key was a currency dealer. It’s why he’s rich apparently

- currency dealers used to be incentivised for making profits - i.e. they didn’t just make a salary, but they were encouraged to make profits with bonuses for superior performances - thus, they can make considerable sums of money for taking positions base don million dollars.

- thus, they are able to take a very small margin between the buy and sell of a currency - it’s about the banks and the sorts of instruments that they are in that generates an income stream. - the sorts of numbers one might expect to generate on the Diner’s Club is about 23% - the default interest

rate could be anything up to 17-18%. !If something is imported it would have been sold in a currency other than NZD - you as a consumer are exposed to currency fluctuation. - NZD has been getting stronger relative to other countries - this makes imports cheaper - and so you don’t see any increase in prices because of currency

- e.g. would we see BMW or Mercedes change their value form one year to another due to changes in currency? No - the company that does the importing wants stability too

- so, although imports may be cheaper, has it flowed over to us as the consumer? - whether its inflation or interest rates and the relationship between them affects all of us !!!!!!!!!!


Accounting 151G - 3

Financial planning process !!1. Define financial goals

• where do you want to be in the future? !2. Develop plans

• plans like superannuation/pensions • saving plans • investing more = might very well be a

different picture about where you might be in the future - it doesn’t matter about saving, the concentration is about not spending. Or when you are spending, making sure you get value for your spending. It is a VALUE consideration. Just because the ticket price may say $10, it doesn’t have to be

• The difference between what the ask price is and what you paid is automatic saving.You don’t have to concentrate on saving - it is on not spending, unless you’re getting something which is value. !

3. Implement plans !4. Develop budgets

• putting numbers to it • is $1 million a lot of money? - it depends. • what will it look like in 20 year’s time though? - it is highly likely to be different. What will $1 million dollars be

able to do for you in the future? - it’s likely to buy you less in the future than today - the value of money changes over time • INFLATION !

5. Evaluate results !6. Revise plans !7. and back to 1 - defining financial goals. !!Be flexible - always look for opportunities - a plan is great, but go through life with eyes and ears wide open - watch, listen, analyse - where might the

opportunities be, and if they present, do you take them? - be committed to where you want to be. - interesting about life is it change direction time and time again !Redundancy - when you are laid off due to being “redundant” or unnecessary - new to this life time - today it’s written to every employment contact; it’s become commonplace - this is due to companies today being constantly bought and sold off constantly - today, one can have 3 different career changes on average. and also back then, you could work yourself up the ladder

within the same company - today, the probability of that is not so great


Accounting 151G - 3

- loyalty has changed - but what came first, was it the corporate behaviour with its cost-cutting? - loyalty no longer prevails

- and also applies to the employee’s view - why would the employee burn themselves for their employer - it all comes back to what YOU want. - YOU decide; - have a plan, and put the dollar values to the plan - you need financial plans with budgets !

This financial planning process is a never-ending scheme - because you have EVALUATION - look back and determine whether or not you achieved your goal/how it’s coming along

- this is why you need flexibility - to deal with any setbacks or opportunities that come along - it does NOT make the plan wrong - the plan is right, with the information and knowledge you had at the time. It’s

just that things happen - things change. Value for Value - there is a time and place for everything, but keep in mind you want value. !Money!• used as a medium of exchange • financial goals are stated in dollar terms • need to consider utility, or amount of satisfaction derived from purchases, as well as cost • may play key role in personal relationships !All of the things we ultimately do is about money - that is what financial literacy is all about money. What do we do with it, how do we get it, where does it go etc. !Gold standard: - currency used to be based on gold - e.g. back then you could take $1 to exchange for $1 worth of gold

- German gold - held outside Germany. Germany, after the war shipped gold to America (and France and Paris); about ~18 months ago, Germany asked America for the gold back - America declined.

- Why didn’t they send it back? - because America probably lent it to someone else; we don’t know where the gold is - it’s all based on paper (currency). !!

Money - “May play key role in personal relationships” - this is the point that really creates dilemmas by not executing the plan - the dilemma of, “we’ve arrived at the end of

x years, and we haven’t gotten the money invested when we said x years ago we’d be at a certain stage” - one of the big reasons for many relationship break downs is because of money - and it’s always because of too little

money (never because of too much) - money is a part of everybody’s every day life !!

To attain your financial goals!• you must be specific in defining goals, and focused on results • make goals realistically attainable • prioritise goals and set a definite time frame !Putting target dates on financial goals!• Short term goals (e.g. within the next year) • intermediate term goals (e.g. within 2-5 years) • long term goals (e.g. greater than 5 years) !Everything changes - short term, medium and long term - the same as companies. Companies must plan for the future - no good dwelling over the past. Short term/medium/long is different for different people - as well as for different companies. e.g. in the wine business, by the time you get land, plant the vines, and they start producing a crop, it’s 6 years - to the wine industry it’s considere short term. Everything is relative !


Accounting 151G - 3

From goals to plans:A lifetime of planning!• Young singles • young couples • young families • empty nesters • retirement !During your life, things will change - you will be quite different as a young single compared to when you’re retired. This is why the planning is dynamic - even in retirement you must plan (you don’t know how long you live) - at some point in time you die, you just don’t know when. Therefore, you need planning e.g. who’s going to pay for the funeral (is there enough money for the funeral), how to pay the mortgage, etc - it’s all different, whether you’ve got families etc, what might happen. Personal financial planning lifecycle![see graph on page 4] In the early stages of your life, you have a deficit. As you grow older and get a job and have an income stream, you’d pay off these deficits (e.g. student loans), if you get into a relationship, and for example you decide to not have children, it is plausible to believe that you will have more money left over - children are not cheap. !Benefit of planning: • your money works more efficiently for you by utilising the financial wonder; The power of compounding through

time !The power of compounding through time!We’ve already taken on board about the dollar - that its value today is not the same tomorrow; it doesn’t buy as much over time. Right now though, we’re not talking about buying - we’re talking about NOT buying !Taking money, and putting it into a bank that pays you interest.

Above is the equation for compounding interest - it gives you the future value (FV) of money that you would get investing current money at its present value (PV)

given n years (or other compounding periods) at a compounding interest rate of r !Looking at how this works, growth of $1000 at 8% per annum, what is it worth in 40 years time? - $1000 today invested, would give $21,725 in 40 years time


Accounting 151G - 4

Lecture 4 !!A 2% difference in interest rate, when compounded, makes a major difference - especially more so over longer term of investment. !Life is a dynamic process. There is always something that could happen - and more things could happen than would. !!!

Simple interest - this is when interest is reinvested at the end of the compounding period; and thus, accumulates.

(Simple interest is not important in this course) !!!!!!Use the personal computer to:!• Prepare financial statements. • Plan retirement • Track investments • Analyse needs

- we have many tools available now for the preparation of plans, budgets, and monitor them against actual performance as time goes on. At all times though we’re looking at the future - and what needs to be done in order to achieve that end. !

The planning environment!• Financial planning is carried out in an economic environment created by the interactions of: - Government - Business - Consumers - Capital Markets - Reserve Bank !

We look at this in the schematic - the involvement of all these people in the big picture of the economy - what does it look like when we see the relationship between business, government, and the consumers. This makes up the economy. What is the interaction between that? - people actually work, and generate income. Some of which will be spent on goods and services, e.g. food. Food requires someone to be able to grow/manufacture the food - companies. And then we have the government, which is the overarching body that looks after the economy as a whole. !Consumers and companies pay taxes, and the government is the receptor of taxes, and they disperse this tax money that works with their policy. !!!!!


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Fiscal policy - Government spending!Government policy decision are used to reinforce the economy in an effort to:

• Provide economic stability • Maintain acceptable employment levels • Control level of taxation !

The government is responsible for fiscal policy (a policy about budgeting for the economy as a whole in terms of the revenue they generate largely from taxation). !The government has decisions about economic stability, and more importantly, about economic growth. It achieves this stability and growth by maintaining employment levels. The government’s income is all about taxation - i.e. they get money from each and everybody who works, and companies, which pay taxation on their profits. The government also has state-owned enterprises, e.g. power stations, dams, etc. These generate revenues for the government also. The present government has been privatising a number of state-owned assets. Privatising means putting them into the public sector, or, as we might say, the private sector when it becomes listed on the stock exchange. Thus, we have shares like ‘Mighty River Power’, and ‘Genesis Energy’ etc - which have been floated off to the private sector. The Government holds only 51% of these companies, and the rest is with shareholders. However, most of the government’s revenue is still from taxation. !When we look at financial statements, we have something called a profit-loss appropriation account This is an appropriation in terms of shareholder wealth - but when it comes to taxation, we could argue it is a mis-appropriation of some of the profits going to the government. Anything that the government buys/pays for comes from taxation - we as the workers pay for it. !!!Monetary policy – Reserve Bank!• Controls money supply • Used to stimulate or contract economic growth • Interest rate management • Effect on exchange rates !• All this is about the control of inflation !!!!The Reserve Bank’s (RB) job is to control the money supply. Currency in NZ is issued by the RB. They are also charged with ensuring growth in the economy - along with the government. In particular, the RB is involved in interest rates management. !OCR = Official Cash Rate • This is the base rate that the RB sets, which other banks must then pay to borrow from the RB. Therefor,e the OCR

concerns the banking community. The OCR is one way in which the RB is able to manage interest rates - as of right now, due to the OCR being raised, the interest rates have also gone up. Good news or bad news? - it depends. It depends on whether you owe money to the bank or whether you’ve borrowed money. e.g. if you are a borrower on a floating rate; your interest rate will increase as a result of this arrangement between the RB and other banks.

• It also has an effect on the change rates - what we might expect is that there is some upward pressure on the value of the NZD. This is because there are some countries where the cost of borrowing is very low - e.g. 1% - Let’s say for example someone takes borrowed money on the 1% interest rate, and invest it in NZD. And whether

it’s on deposit or whether they buy some sort of financial instruments (e.g. shares), it increases the demand for the number of NZD that are required - since you can’t just invest Japanese Yen or USD - the only way to exchange for NZD. This demand pushes the NZD up.

- we believe the market in New Zealand to be efficient.


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- due to an increase in the OCR recently, people may have gone out and borrowed at 0.5% or 1% and continued to buy NZDs all week - so that the announcement today may have little effect as it was always anticipated that would happen.

All of this is about the control of inflation • By increasing the OCR, it dampens the demand for money by making it more expensive. Value. If interest rates

increased, things change in value - if interest increases, then perhaps you need to borrow less. You can’t afford a higher interest rate - and this is one of the worries we have; that individuals are unable to make repayments when interest rates rise. And the banks are mindful of that, and therefore therefore the RB demands that banks comply with a ratio of what they lend. Even banks must change over time too.

• The OCR is the rate that is transacted between the RB and other banks in New Zealand. !Reserve Bank Policies seek to control:!• Economic Cycles – Stages related to employment and production levels – Growth measured by changes in GDP • Inflation – Measured by changes in CPI – Affects purchasing power and interest rates – Affects financial plans and goals !• Inflation is what you try to control via the RB - changes in the consumer price index (CPI). Prices change - you can’t

buy the same amount of goods with money today as you could in the past? - NO. • All of these things affect financial plans and goals. Hence, when it comes to voting/elections, you want to be rightly

interested in these things, as the politics will impact on your goals and aspirations.

• We see economic cycles: - What happens over time? - what happens to people’s levels of confidence? The government wants to see stability,

but it doesn’t happen that way. Observing what happened with the global financial crisis a few years ago, it didn’t take long for it to reach NZ.

- There are large impacts for smaller economies, like New Zealand, when larger economies like US are affected - “if USA gets the sniffles, NZ gets pneumonia” !

Christchurch - damaged; trying to rebuild houses Immigrants = further pressure on housing. There may be more and more demand (e.g. for housing) ,but yet the supply may not yet quite reach, and thus prices would be expected to go up, and this is where we have control of the CPI. So when interest rates go up, we might indeed see some dampening in the currency - some dampening in the economy - recession. And if this progresses, we


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can reach the depression stage. But during recovery, the government steps back in - buying back bonds, getting the RB to issue more money/cash. !America has a different definition for the CPI, because not all goods and services go into their “basket”. There is a whole lot of prices which ahem been going up in America, haven’t yet hit the statistics because those goods haven’t yet fit into the basket of their goods, from which the CPI is measured. Businesses in NZ are ‘confident’ about the future. !What determines your personal income?!• Age, marital status • Education • Where you live • Career choice !When you first start work you’re at the ‘lower’ levels - but gradually, as you progress into more areas of responsibility, so too will your income increase. It’s not because you’re older, it’s because you’ve got more experience - it’s because you’ve got some qualifications that put you on higher levels. This experience generally comes with age, but not necessarily age itself that determines one’s income - more experience. Whether marital status has any role in income is debatable. Education is important in proving you have the qualifications for a job. It is possible to have 2-3 career changes in your life. !Financial planning profession!• A specialised body of professional practitioners • Ethical responsibility within a strategic professional vision • Code of ethics and rules of professional conduct !A profession developed from the need of having to have somebody assist with looking after your future wealth. You don’t have to become an expert of all the financial instruments available to assist with your wealth creation, so that when you arrive at a stage of your life you feel comfortable. !Diversification - don’t put all your eggs in one basket. It is important to have different sorts of assets in your portfolio for wealth accumulation. !!!!!!!!!!!!!!!!!!!!


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Module 2!!Mapping out your financial future Financial planning facilitates: • Greater wealth • Financial security • Attainment of financial goals !Financial plans, budgets and statements facilitate financial planning • Link future goals and plans with actual results • Provide direction, control and feedback !The interlocking network of financial plans and statements • Financial plans (Forward) • Budgets (Forward)• Financial statements (Backward) !Nobody knows that interest rates will be like in 5-year’s time, but that doesn’t stop us from planning our goals/budgets. Financial statements and balance sheets are prepared today - and it is a result of the history. The balance sheet is today; has nothing to do with tomorrow; what you owe/own is what you owe/own today. The different, then, is what are you worth. It is a back-ward looking document. Companies also have annual reports - these (like the balance sheet) are historical, they’re from some point back in time up til today, or it has a revenue stream over a period of time.

Above is the leap between the ‘vision’, the ‘plan’, ‘evaluating’ etc. e.g. we want to reduce taxes - plan for that, and we convert that all into a budget, which would show expenses etc. !!!!!!!!! !


Accounting 151G - 5

Lecture 5 We’re trying to put together a setting for what you as individuals are about now, and for what you might hope to be in the future and what decisions you may have to make - as you progress throughout life (different roles/jobs etc) !We’re going to have to look at arithmetic today. - we were exposed to the value of compounding, where some value in the future is different than today; this is due to

us having a cost of capital or funds - this is the interest rate - so, in all of the things we do in finance there is nothing of nothing - everything has some cost.

- because even if you say you’re going to do nothing today - that’s fine, but it does have a value, in the sense that your reward has been to do nothing. But the real cost is lost alternative activity that you might have undertake which might have given you a greater benefit.

- But it’s really what it does mean - when you say don’t waste time, there is a lot of stuff you could otherwise do/achieve. Other things of value you could do. !

We’re leading up to actually drawing financial statements. - e.g. the financial statement of the warehouse - in this you’ll find the revenue statement - which is all of the income they generate and their sales at the register etc - and all the expenses incurred, e.g. the purchasing of the merchandise, the wages to staff, etc

- at the end it gives you a profit. - this is the same for you - you earn income, you’ll be selling your services for money that you receive.

- this is your revenue - and you have debts - rents, car payments etc

- when we look at the business world it’s not just out there, it’s actually just a bigger version of what you do personally as individuals. - i.e. generating an income stream, spending it on expenses - we have consumers, the government and businesses (from yesterday) - it all goes round and round - it’s

hand in hand. This straight away impacts your plans too. !Why do we really want to make a financial plan? - it’s all for the purpose of creating wealth. We WANT to be better off in the future than we are today. Exactly the reason why you’re at university - for greater qualifications which lead to better opportunities. All of the things that we do will be to lead towards accumulating greater wealth (in your own terms). finances can be a stress on relationships. We can see that this financial security might be an important thing since we can’t see into the future to see what the government may do in the future - e.g. remove pension. !Therefore, it’s important that you are able to put into place some sort of planning to sustain wealth in the future - and set out to achieve your goals. We’re going to write down what it is our desires/wishes are - where do we want to see ourselves in the future. Have a vision of where you want to be sometime later in lfie. Then we convert those visions/objectives into a plan - something called a budget - we put NUMBERS to it. We obey these and live by it to achieve our future goals. then we’ll measure it against what actually happens in our life - how are we coming along in achieving these goals of ours; this is evaluation. Note: everything changes. It is a dynamic process. This is why we must measure what we want to do against what has actually happened. !Control of income/expenses: the easiest way to save is to not spend. That’s the first start - control the income, control the spending and then when we get to the financial statements we’re able to draw up financial statements. What are our obligations - what has happened to our net worth? where are we currently compared to a year/6 months/3 months ago in achieving our goals? It is a dynamic process. and the same thing about income expenditure - what we believe we’re gonna get x amount of income but for whatever reasons events may have occurred which could have for example cut off our income stream - e.g. redundancy. Redundancy happens at a management level - not at an operational level - you become the result of decision making at some higher echelon of the company.

“Trying to manage academics is trying to herd cats” Special planning concerns:!For individuals: • Dual income families • Employee benefit choices • Major life changes, such as:


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- First job, loss of job - marriage, divorce - children - change in health, death of family member - change in economy !There are various changes that could happen during your lifetime. Be flexible. Benefits is another form of saving - another form where money is taken from you and saved/invested for you. !More things could happen than will happen in life - it requires us to at least give consideration to them. Not all of these events happen to everybody but they nonetheless require consideration. Any one of these events might rock our ideal prospect of the future. You need to be flexible - you need to be able to update your thinking of where you are, and where you next need to go. !For business: • continuity of earnings • competition • general economy issues

- interest rates - exchange rates

• recruitment • regulatory issues !Financial planning is not any different for the business - they too are concerned with their incomes/profits. They too rely on an income/profit stream - they must rely on what they’re able to earn, spend and save. The business must consider the competition - what happens when a new store opens up? It impacts on their earnings. There are also general economic issues - e.g. exchange rates. If there are changes in exchange rates due to us importing a significant number of imports we should expect exchange rates to increase. Thus, the exchange in relation to RB, have relations to the interest rates. Therefore when interest rates go up we would expect increases in the exchange rate. There is currently a direct relationship between the NZD and Chinese Yuan. Therefore you can directly trade one for the other, unlike for example, having to sell to get USD then buying AUD. Recruitment - considering recruiting the right sort of people to do the right sort of job. Regulatory issues set by government - ongoing. !Time value of money (TVM): putting a dollar value on financial goals!• a dollar today is worth more than a dollar received in the future because ti can be invested and can earn interest !What we saw with compounding was the essence of the TVM. e.g. if you invest $1000 at 10% it’d be worth $40k in 40 years time. This arithmetic is very straightforward. When we talk about financial statements, yes they add a whole lot of dollars of different years together, but we can’t do that when we’re looking at wealth creation. A dollar today is different than a dollar in a year’s time. We’ve talked about how even if it was in relation to inflation, buying something for a dollar today wouldn’t get you the same stuff you’d get in the future.

• Interest rates - include some value of inflation. Interest rate and opportunity costs is what its all about. When we don’t invest present money - it means we’re missing out on collecting interest. It’s different in terms of present value and future value. Present value is right now - since now is when we’re to make the decision. We can’t time travel. It’s done and gone. We’re looking forward in terms of the time value of money - see what it would be worth in the future. Doesn’t matter how long away your future is - anything related to the future is a future value. !Similarly there might be a time where you’ve got some future value you need - what might that value be TODAY? Since we can calculate what the future value would be for a present invested value, we can go backwards and calculate what we would need to invest today from a value/wealth we want in the future. By definition: • we’re COMPOUNDING when we go from the present to the future - depends on the interest rate • we’re DISCOUNTING when we go from the future to the present - depends on the discount rate !!


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Types of TVM calculations: !• Single sum - one lump sum investment with no more additions or subtractions. • Annuity - a series of equal payments (or receipts) made at fixed time intervals for a specific number of periods. !A single sum like we saw the other day fro $1000, what would the value be in the future give a certain interest rate, and invested for certain number of years. This is for just one sum of a thousand dollars. An annuity is a stream of equal payments or receipts - a sum of money given for a fixed period of time, This can either be annuities or payments or receipts in the same way as the single sum can be a single sum of a payment or a single sum of a receipt. - single sum vs stream of payments. !Ways to calculate TVM!• Formulas • What we have are some tables (appendices A-D) • financial calculators • internet calculators !All the tables do is represent different periods (first column talks about number of years - periods; i.e. not restricted to just a year), period interest rates - giving factors, all relating to different interest rates and different time periods. We’ve got all these other things and you can go online and on excel and do the same thing - you should use these tables to actually feel the dimension and way in which these numbers change over time - you can see what happens when interest rates get greater and the time gets longer. You can see the dimension growing or contracting. Is a future value going to be bigger than a present value if interest rates are positive - and the answer is yes. As you’re going to invest the money and so there’ll be more dollars - the power of compounding. Conversely, $1 today vs next year; worth less. Looking at the present value tables, the further we get out in time the smaller the factor; looking at the future value, the greater the factor with greater time. !

For the test you all need a calculator - one that adds, subtract, multiplication and division. Can use Graphics !Future Value!• is the value your invested money will grow to when earning a specific rate of interest over a specified time period • is the process of growing today’s present value to a larger future value by applying compounding interest - known as

‘compounding’. !The FV is some some in the future greater than the PV. It’s the process of growing something from today to give a greater value some time in the future.

FV = PV x (1 + r)n The future value is the present value x some compounding factor, (1 + r)n - given different n’s and different r’s - can see tables for values !What would $5000 grow to if invested for 10% p.a. in 6 years? • it gives you $8858

- in a year’s time, you’ll have at the end of the year $5500, and the end of the 2nd you have this 5500 invested, and gives $6050. At the end of this second year you’ve invest this, and so on, and so on. Eventually at the end of 6 years you have $8858

- the future value factor for 6 years at 10% is 1.772 - 5000 x 1772 = 8858

- $5000 today is the same as $8858 in 6 year’s time - this is the time value - yes it’s 6 years away, but the interest rate is 10%. We’ve gone form the present to the

future with this one calculation. - this is the single sum - and all we’ve done is accumulated interest - term deposits: takes your interest annually, and calculates new interest based on the new value including the

accumulate interest


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Ordinary annuity!• Definition: A constant flow (stream of receipts or payments) for a specific time - the flow begins today. It commences now. - e.g. hire purchase repayments, rent receipts - you must pay these so and so months for a certain period of time !Calculating the value of FV of an annuity!What would you accumulate if you could invest $5000 every year, for the next 6 years, earning at 10% pa? i.e. you add in $5000 at the end of every year, in addition to the accumulated interest.

What about if indeed we were to look at the table - what might that give us? - look at the annuity table (App B) - the FVA (future value annuity) factor is given as 7.716 - given that n = 6, r = 10% - we attach this 7.716 to the regular stream of $5000 - giving $38,580 !We’ve looked at the future value of something - a single sum, and then we looked at a stream of payments. We can’t have an annuity of different numbers of dollars, they will all be single sums. !Present Value (single sum)!• The amount needed today to invest at a specific rate of interest over a specified time period to accumulate the desired

future amount • ‘Discounting’ is the reverse of compounding and is the process of working from the future value back to the present

value !Looking at present values - going from the future to the present; how might this be applied? - say someone would be willing to give you $10k in five year’s time or so, what

present value would you want to be given that would be equivalent to $10k in five year’s time?

- This is discounting - it is the reverse of compounding. - PV = the FV divided by the present value factor. (also in our table appendices) !Calculating the present value of a single sum Example: • You wish to have a dollar sum of $8,860 in 6 years. If you can invest at 10%, what single lump sum must you have

today in order to achieve your goal? - Answer: PV = 8,860 ÷ (1 + 0.10)6 = $5000 !

The magnitude - the further we are going out in time when going from the future to the present, i.e. discounting, the further out the number of compounding periods and the higher the discount rate, the smaller the discount factor. !!!


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Calculating the present value of an annuity Example: • your rich uncle wishes to give you a sum of money today to use for the next four years of college. If you need

$10,000 a year, and will leave the remainder invested at 7%, how much should you tell him you need? - easy answer: take as many as he will give dude - We can’t say that $10k x 4 = $40k. That’s not what we’ve got - is it gonna be more or is it going to be less? - PVA (present value of annuity) factor = 3.387 [taken from appendix D]

- this means that the PV = PMT x PVA = $10,000 x 3.387 = $33,870 - that means that today, you would take $33,870 today - and you would still be able to pay college off at $10,000

a year Lecture 6

Recap from last lecture: • Time has a value and therefore, deferring value may very well be in your interests. !Future value - reflected on compounding (interest on interest) - the future value will always be greater than a present value; a dollar today will have a bigger value in the future because of compounding. Conversely, the future value will be in present value terms, greater than the present value. !Annuity - a series of receipts or payments !When the OCR rises, the bank will be very quick to say, “we are now going to adjust all the loans we’ve made to borrowers”, and the interest rates will rise. (fixed and floating interest rates later lectures) When the OCR falls, it takes some time for the bank to reflect that in their repayment schedule. Similar to petrol; all prices change over time but sometimes it takes the oil companies a long time to take any reduction in their price (although they are very quick to increase their prices whenever there is an increase in the price of oil. Those bitches) - therefore, as yourself who’s really benefiting from increases.

Today’s material: Balance sheet (Statement of Financial Position)!A statement of: • Your financial position at one point in time • For example – the balance sheet of ‘you’ as at 30 June 20xx. !- The balance sheet is the statement of your financial position at a point in time - it is e.g. at midnight on the 31st of

March/whatever date is. Often times its called the ‘snapshot’ - it’s a snapshot of your particular position at a single point in time. e.g. the Warehouse (p. 36-37) says balance sheet as at the 28th of July.

- This is for a year - it’s for a period. It doesn’t say anything about when the revenues was generated - just that over the 52 weeks they generated a particular profit etc !!!


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This is a simple exercise in saying that all of the assets will equal to liabilities (what is owed) + Net worth (aka equity). The balance sheet always balances. Hence, balance sheet.

A = L + E Thus, bottom line: the balance sheet is the snapshot of one’s financial position at a single point in time. !We can also rearrange the terms - i.e. what is the net worth? • Net worth = Assets - Liabilities !!

What you own = assets. There are two types of assets; those that can be realised within the year, which are called current assets. Non-current asses are those who have a long life, e.g. a house. !Liabilities are what you owe; you can for example, owe on your car loan, owe on your credit card, student loans etc !Credit card finance is expensive - being charged interest on interest for borrowing. !!

Your net worth is what you owe - but it’s what you owe to you. If you sell all your assets, and pay off all your obligations (i.e. liabilities), what’s leftover is yours and yours alone - its your net worth. This is the same for companies like the WH. All of the assets, obligations and equity. Who owns the equity? - all of the shareholders. All of the people that own shares. A proportion of the company is owned by shareholders; you yourself are the sole owner - the sole shareholder of yourself. You’re your own little company. How cute. !Some people’s assets fall short of your obligations - i.e. you owe more than you own. What you don’t have on your asset side however, is your own knowledge - your own intellectual property. Your degree from university isn’t something you can easily put onto your assets - although it is one. What are trade-marks, patents, etc - same thing, difficult to value. - so remember, this is for an individual but it’s all the same for companies too !The concept of solvency!• If your net worth is positive, you are solvent and have enough assets to cover your financial obligations. • If your net worth is negative, you are insolvent and therefore..........!! !In the early years of your life you’re in negative territory - you’re consuming more than you are generating through your income. It’s not until you’re mature and have some job where you have income generation in which you could meet your commitments - thus, your net worth would become positive. If you do indeed have a negative net worth, it could be you are insolvent. As opposed to when you have a positive net worth, in which case you are solvent !Companies also become insolvent; to the extent where individuals become bankrupt due to their inability to meet payments or the demands of the obligations. In the case of companies though, they undergo liquidation (they start to


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liquidate and sell off their assets). So yet again, reinforcing how what happens to you as an individual can happen to the companies at large. !Revenue Statement!• Total Income – Total Expenses

= CASH SURPLUS OR (CASH DEFICIT). !• A measure of your financial performance over a given time period. • For example – the revenue statement of ‘you’ for the year ended 30 June 20xx. !The Revenue Statement is for a period of time. - the balance sheet (BS) is a point in time. - the revenue statement (RS) is a period of time. !RS considers cash surpluses - but doesn’t have to be cash. It could also consider income that is yet to be paid to you, but you have already earned it. The RS is a measure of your financial performance - for you as an individual, it also applies to a company. !Where do we get all this form?: !Income: Cash IN <<< • Wages and salaries • Bonuses • Interest and dividends • Child support • Tax refunds • Gifts

- does NOT include loans which have to be repaid. This is not deemed to be part of revenue as you must pay this back. Therefore how does the balance sheet balance - you have a loan which is more cash (asset) - but you have more obligation to pay back the loan (liabilities). !

Expenses: Cash OUT >>> • Fixed – Rent or mortgage payment – Cable TV – Insurance • Variable – Dry cleaning – Recreation – Eating out !Fixed and known; e.g. rent or mortgage payments. Not paying either results in shit hitting the fan. Insurance; you must insure your motor vehicle and the loan people who loaned money to purchase it demands insurance - same idea behind the house. And some of these expenses are fixed !Variable; changes from time to time. It doesn’t matter if you don’t for example take your clothes to the dry cleaners this month or the next etc. Food - perhaps don’t go out for dinner, for that coffee etc. !- this all exists with companies as well. Decide what is a fixed vs variable expense !Cash surplus (deficit)!• If your income exceeds your expenses, you have a cash surplus. • If your expenses exceed your income, you have a cash deficit. !Using your personal financial statements!• Maintain a good record keeping system. • Prepare financial statements periodically. • Track financial progress.


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- there is great importance in record keeping, in knowing what are the costs incurred either at a fixed or variable nature, and what have you spent it on. Measure the plan against actual (like companies too). It is important to regularly update in accordance with the plan - e.g. companies have quarters (financial quarters).

- It is the monitoring and then taking control; sometimes there’s a phasing control i.e. spend money too early; spending it this month instead of what we said we were gonna do, which is the next. It doesn’t make the plane wrong it just means that things have changed. Nothing stays constant.

- We find that prices move - e.g. for the WH shares. This means that Net Worth changes as well. !Ratio analysis!Financial ratios enable you to: • Track progress toward your financial goals; and • Evaluate your financial performance over a period of time. !given that we now understand what a financial statement (balance sheet) is (what we own - what we owe = net worth), we would want to look and see what is the relationship between the two numbers. The bank is interested in knowing whether you are able to repay loans/mortgages. The Financial ratio allows you to track your progress towards your financial goals. It assists in evaluating what your performance is over time. We have a number of ratios we’ll look at to see what it might mean for us and individuals or as companies.

We’re now considering solvency in terms of net worth and total assets. What is the relationship between what we have as a company as equity (or you as an individual’s = same thing), in terms of total assets? • The solvency ratio means: of the total assets, how much of it (in percentage terms) do you actually own. Or inversely,

how much in % is owned by everyone else, in terms of obligations.

Balance sheet ratio shows the net worth of $40k (the larger the net worth, the greater the financial ‘cushion’), and it says that this family (or company) could withstand a 25% decline in the value of the assets.

i.e. Net worth ÷ total assets 40k ÷ 160k = 25%


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And the greater this value - the greater the financial fall back you could have. Therefore, if these total assets were not valued at $160k, but at 25% less, then the net worth would be equal to 0. Therefore who suffers from a decline int eh value of the assets? - first is the net worth (the shareholders). Because the liabilities or obligations are saying they need to be satisfied as to

the repayment schedules entered into, unless of course, you become involved and bankrupt (or the company goes into liquidation). It doesn’t matter than there’s a decline in the value of assets sometimes - you’re here for the long term.

- Therefore, any fluctuations in the value of your assets don’t matter so much as you go through life. The further you go into retirement the more certain you become that you want to be sure of your asset values. Therefore, what happens is that your risk profile changes over time

- when you’re in your 20s, you’re more risky. Compared to your 50s you’re much more conservative (generally).

Liquidity Ratio (important) This relates to the ability to have liquid assets (that is to say, cash/deposits/the ability to convert something immediately into cash to be able to meet the current fixed and variable commitments). When we’re talking about the company we’re talking about the current ratio - that is now current assets relative to current liabilities. - the current assets, the short term assets; the biggest proportion of which is cash. - relative to all of the obligations you have - i.e. your liabilities (what you owe).

• Summary: it is the ratio between having readily available funds to meet your needs (liabilities) whenever it demands !

Balance sheet ratios Example; liquid assets = $2,225 and current liabilities = $22,589. $2 225 ÷ $22 589 = .099 or 9.9% • The higher this ratio, the longer the existing liquid assets can cover the yearly committed obligations. • This family could last about 1.2 months or 1/10th of a year on their existing liquid assets. !- This gives you a ratio (percentage) of 9.9% ~ 10%. therefore meaning that this family/company would be able to last

about 1.2 months with its available funds (i.e. 10% of a year = 1.2 months). i.e. they would be able to live for about a tenth of the year, liquidating their assets to pay off their debts (they are able to go on a year on their current liquid assets).

- what we want to do then is measure this against some base measure. Is it the measure the bank wants, or the measure as per your own projections, or is the the measure because on average the whole community has 1.5 months? [no value judgement made] !!!!!!!!


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Savings Ratio What is the available cash surplus being generated relative to the after-tax income. (when you get an income, the tax is being taken out before you get it). • We discussed our propensity to consume. This is effectively the propensity to save. • Therefore:

the propensity to consume + propensity to save = income after tax • if you’re not spending it, then by deduction you must be saving it.

How much of the after-tax income is being saved? The relationship between the propensity to consume is preferred because it is the consumption that is in your power of control. Your power of control rests with consumption. Therefore having controlled that this surplus is your ‘residue’. !Revenue statement ratios Example $13 336 ÷ ($73 040 – $14 430) = 0.2275 or 22.8% • The higher this ratio, the greater the amount of after–tax income being saved. • Equal to (1 – APC)

- (1 - the propensity to consume)

Debt Service Ratio This is the percentage of monthly loan payments relative to your income stream. Banks are very interested in this - they want to know whether or not you tend to pay the bank loans back first above anything else. This is the relationship about debt servicing (the ability to service i.e. pay back your debt) • When you go to buy a house you could imagine the banks would like to firstly know how much you earn. And see

what your gross income is, as it is from this gross income that the banks would be paid back. !Revenue statement ratios Example $1 807 ÷ $6 087 = .297 or 29.7% • The lower this ratio, the less the difficulty in making monthly loan payments. • This family’s ratio is under 35% and would probably be considered at a manageable level.

NB: Some lenders may use ‘after tax’ income as the denominator !Page � of �23 36Theantay Keo

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Preparing & using budgets!Budget • A short–term financial planning report that helps you achieve your short–term financial goals. • Achieving your short–term goals then helps you achieve your longer–term goals.

- It doesn’t matter, the same principles apply. It’s all about achieving short term goals. The long term is made up of a whole lot of short terms - since it is the short terms which you have a greater control over and they accumulate to become long term. 1 hour = 60 minutes. !

*talking a girl after lecture* Girl: How can I prepare for the test?

Him: How can you prepare? Come to lectures. Lmfao. Big help.

Lecture 7 We want to check the shares against some other measure - and we have an index of stocks on the stock exchange. How much of the company shares that are on issue are widely held - there are some companies where the majority of the shares are held by an individual or a group of individuals. What’s happened to the share price of the WH? The index has grown but the WH shares have dropped - there may be a sentiment in the market place that retailing ain’t fun to investors. At the end of the day nothing happens in isolation, and when an event occurs there is an affect on other parts of the economy. !Budgets help you:!• Monitor and control finances. • Allocate income to reach goals. • Implement system of disciplined spending. • Reduce or eliminate needless spending. (value - utility in the spend; is it worth it?) • Achieve long–term financial goals.

- the further you get out in time, the riskier and less sure things become. And with more risk though, we want more reward.

- Budgets work on the basis of what we know - we make a plan, but then events happen. e.g. someone gets sick - you can’t plan for that - can’t work - no income - have to borrow. This is why you may build in a contingency plan, a ‘nest egg’ - something to fall back on in hard times.

- in terms of the budget that we’re looking at for individuals, take on board that it is exactly the same process happening in the business world with various companies - they’re doing the same thing: They’re budgeting for revenues (income generated from services or goods), and they want to know what are the costs going to be associated with that, as well as considering the surplus included with that. At the end of the time what is the surplus that they can expect - we talked about our financial statements in term of profit, and in our case as individuals it could be represented by cash flow. i.e. you as an individual could be operating on the basis of surplus cash (companies operating on surpluses in terms of profits)

• cost-cutting is a reflection on poor management - if you could cut costs now, why not do it before. !!The budgeting process!• Estimate income. • Estimate expenses. • Finalise the cash budget. • Deal with deficits and surpluses. !- we must make estimations and assumptions. We must make estimates both for revenues and expenses and then we

prepare the cash budget. We can have a shortfall or a surplus; every year will be different. Needs change - income levels change etc, requires flexibility - must be able to adapt to change. !

What should you do if you have monthly deficits?!• Shift expenses from months with deficits to months with surpluses. • Use savings, investments, or borrowing to cover temporary deficits. !


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!!What should you do if you end the year in a deficit?!• Liquidate savings/investments. • Borrow to cover the deficit. Or with better planning you could have taken steps to:- • Cut low priority expenses and alter spending habits. • Increase income. !- it is difficult to increase your income in the short term - and if you could, why not do it before? It is not likely that

you could increase your income overnight - but what you can do is decrease your expenditures - reducing your outflow, rather than suddenly increase income. You could also depend on liquid assets. !

Deficit spending!• Deficit spending causes you to:

- Deplete an existing asset - Incur more debt - Or both!

• Deficit spending decreases your net worth. !- If we continue to live beyond our means the it is wealth destructive - this goes without saying. “You must cut the

cloth to suit” - i.e. if this is what you want in the future then you must tailor yourself and your income stream to reach that goal. !

Things to remember about a budget!• Use a Budget Control Schedule to compare your budgeted figures to your actual figures and determine the variances. • Continually update your budget based upon the actual figures. • Always try to keep your budget balanced or, even better, at a surplus. !- the budget control system is really the essence of it all. Yes, you have a plan, but you must monitor it and see how

you’re coming along. Evaluate progress. Don’t forget that events occur and thus you must modify to include new developments/events - this does not make the budget wrong. What it does do is that there were some events unseen which are incorporated into the plan. !

Module 3!!Role of cash management in personal financial planning!• Cash management deals with the routine, day–to–day use of liquid assets. • Liquid assets consist of cash and other assets which can be readily converted to cash with little or no loss in value. !- we’re talking now about management - the role of cash management. What might there be in tools available for us to

assist with cash management and financial planning. When we look at a company and relate liquidity it’s about having short term funds available to meet short term obligations.

- For a company we generally talk about it in a 12 month period - but for individuals it might be monthly (what liquid asset shave you got or are going to generate to pay for the obligations due). Where do you have the liquid funds or income stream to be able to do that.

- We’re down to companies looking at things at a 12 month period - that is, their current assets and liquid assets, which are largely about cash, inventory and people who owe the company money, and the liabilities that the company owes to suppliers and staff - this is the same thing for us an individuals. It is a list of all the things owned/owed - and we break down own into short term/long term; same thing done for obligations. Liquid assets can be readily converted into cash. !!!


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Examples of liquid assets: • Cash• Cheque Accounts • Savings Accounts • Money Market Deposit Accounts • Term Deposits • Government Issued Treasury Notes (government bonds; short term instrument; issued at a discount - e.g. you pay $990 to get a $1000 treasury note - used when the government needs money - these are issued as a coupon and are exercisable at either 6 month intervals or annual). Corporate debenture is an equivalent but is issued by companies. !Purpose of liquid assets:!• Make purchases. • Meet recurring living expenses. • Provide reserve for unexpected expenses or opportunities. • Used temporarily to accumulate funds for longer–term financial goals. !- we need liquid access to make purchases. We need a reserve (nest egg) in the event some unforeseen circumstance

occurs in which case you need money. Accumulation of assets is something we want to do all round

We have this thing called insurance - it’s highly likely when you go to get a mortgage from the bank, they say they want you to take a life insurance policy on either the owner or the bread-winner of the family (if there’s only 1), so that in the even any of them die you cannot rely on regular mortgage payments, and thus, the banks would take money from the life insurance policy. Furthermore, the bank may require you insure the property; home insurance. - Services: there are services out there to assist in putting together financial plans for you. They do taxes too. - If you work for the warehouse and they pay a dividend then because the company has already paid tax on the profits,

you as the dividend recipient gets the benefit of the tax that has already been paid. We call those imputation credits. And they are the value of the tax that has been paid by the company and are now being paid to you as the shareholder. In tax preparation (not so much today) the company is required to deduct PAYE - i.e. they take out tax from your income before even you get it - in the same way as dividends.

- Anyone who generates a commission for income could potentially have some conflict with the customer - Our generation has probably generate door levels of wealth than any generations beforehand, and will likely have

generate more wealth than any generations to come. - The number of trusts established in subsequent years is proposed to have been increased. !!!!!!! !


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Lecture 8 Types of financial institutions!What financial institutions are there in the market place? Who are all the participants in the finance markets? How would you access appropriate funding from these facilities !Banks • Largest type of traditional financial institution. • Offer full array of financial services.

- fewer now than they were in the past (amalgamations and takeovers). Banks used to be locally NZ, but they’ve been mostly taken over by Australia or UK etc. They have a whole range of products - too many to list. !

Building societies • Similar to banks in that they accept deposits and make loans. • Traditionally institutions that are mutually owned by depositors.

- largest lending is all about housing. They’ve extended the offerings of products over years, to the extent where they actually become banks. These building societies we see are owned by its members !

Credit unions • Provide financial products and services to specific groups of people who have a common tie. • Similar to building societies in terms of deposits and loans. • Typically pay interest rates higher than those of other financial institutions.

- established for specialist needs - the most recognised ones were for the public service investment society. i.e. it was for public servants (those in the public sector) could treat it as a bank.

- typically pays interest higher - why? As you take on more risk you want greater reward - and so when we look at the return one gets on government stock, it should be relatively risk-less. We expect the government to not default on their borrowings - we would therefore expect a relatively and comparatively lower interest rate due to risk minimisation. Therefore why this greater increased interest rate for credit unions?

- Credit unions too are owned by its depositors - they are the recipients then of benefits. Where companies might pay dividends on shares, when you’ve got funds with an investment society such as Credit Union, not only does will you get a higher interest rate because it represents part of the profit of that institution. Therefore you are actually somewhat part of an owner if you invest in a credit union. !

Cash management products!1) Cheque Accounts = Demand Deposits - With sufficient funds, banks must immediately pay the amount of your cheque or ATM withdrawal.

- cheque accounts are on demand deposits. i.e. they offer you cheque writing facilities (they give you a chequebook you can use to pay bills or a cheque account) - but people generally prefer to use something like a debit card or even internet banking - we’re seeing cheques less and less. People are more prepared to sue the technology to make payments for goods and services wherever they may be !

Types of cheque accounts: • (1) Regular cheque accounts

- Offered by banks - Pay no interest (unless on overdraft) !

One must shop around when looking at banking institutions and what they offer - find the one best suited to your needs. Nothing is for nothing; e.g. banks may say they don’t charge you certain fees but you must have for example, ~$5000. Therefore it raises the question, would you be better off depositing the 5k and not paying fees, or paying fees with less than 5k? - it’s all dependant on you.What is the most beneficial product for you as an individual. !

• (2) Interest–bearing cheque accounts - Offered by range of financial institutions including banks and credit unions. - Generally require minimum balances to be maintained. !!


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Maintaining a cheque account An accounting approach • Determine services needed. • Consider costs involved. • Keep track of cheques written, automatic deposits, and ATM withdrawals. • Undertake monthly reconciliation. This is what companies do on a monthly basis - they understand by recording all of the payments and all of the receipts so that they can reconcile the bank account at the end of the month with what they said it was going to be when they put together their financial plan - this is what companies do, and it is what we should do ourselves. It is a disciplined approach to measuring and monitoring finances. Evaluating where you are; and determining whether or not you’ve advanced your wealth or not by comparison. !Special types of cheques: • When personal cheques are not accepted, special cheques can be used to guarantee payment. - Bank cheque – drawn on the bank.

- there are some people who will not take personal cheques - they would prefer you go to the bank and obtain a cleared funds bank cheque. I.e. the bank will not provide you with their bank cheque unless you provide them with cleared funds (i.e. money on your account which will be able to applied to that cheque.) !

- Traveller’s cheque – used for making purchases worldwide. - used to be common back in the day. We now have internationalisation of money machines and global credit/debit

cards. Just realise they however are in the market place though. !2) Savings Accounts & Term Deposits • Term deposits are expected to remain on deposit for a time period. • Generally pay higher interest rates than demand deposits. • At many institutions, the larger the balance, the higher the interest rate offered. • Early withdrawals incur an interest penalty. • Savings account balances are ‘on call’.

- savings accounts are on call or on demand. You can withdraw the money as soon as you deposit it; the moment you put your card into the machine. We also have facilities with ‘Term Deposits’ - they like to know they have got a certain amount of money for a period of time. The bank’s business is to take money from the public and lend it to someone else - i.e. they take it and offer interest on deposits at 3% and lend it out to others at 8%. This gives the bank profits. Now one of the issues of the bank is that they want to be able to match their borrowing with their lending and therefore if they have a lot of on-call money (i.e. money in savings or checking accounts), it is unlikely they will lend that money out rather than for on-call, so that they have lending and borrowing book that’s in balance in turns of term.

- a few years ago there were various collapses to financial institutions/companies. One of the things was that customers wanted to withdraw money out - but if that money was leant out to long term assets such as mortgages then they will not be able to realise money from the borrowers (and thus would have to resort to going to ask long term mortgagers to pay off their loan faster). These finance companies can run into the problem of borrowing short and lending long - they need to be able to balance their books. !

Other Money Management Services!Electronic Banking Services • Electronic Funds Transfer (EFT) Systems make possible

- ATM service - Debit cards—linked to your cheque or savings account - Pre–authorised deposits and payments (e.g. paying bills month after month etc - in the same way that you might

be an investor and you hold shares - so you get dividends, and you tell the company to not credit via cheque but to despot it to the bank account)

- Banking by phone - Online banking and bill payment services !!


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Starting your savings program! • Pay yourself first!!!! • Establish an emergency fund. • Regularly set aside funds for financial goals. • Utilise direct deposits and automatic transfers. • Choose instruments best suited to your goals and time horizon. • Include ‘Kiwisaver’ in your plan. • Reinvest interest and dividends. !- The easiest way to save is to not consume (don’t spend), however, there comes a time when you have all your

consumption habits under control and you can concentrate on the issue of saving. YOU are the most important person when ti comes to receive an income; it’s your plan you want to fulfil. Therefore, as selfish as it might seem, you need to pay yourself first; you must look after yourself. Pay yourself first

- Have an emergency fund - a nest egg, to fall back on hard times. Some of this nest egg needs to be topped up - we don’t know how much we will ever need.

- Kiwisaver is merely another vehicle from which you can put money in to generate a benefit/return over time. There are many other opportunities available. Kiwisaver is NOT a substitute for all of this - it alone isn’t enough.

- We now know the power of compounding and what reinvesting is. Looking at that interest and dividends, they apply in specific situations. We get interest on deposits we have with financial institutions. We get interest on fixed interest securities such as debentures or government stock. A debenture is a financial instrument that companies/local authorities will issue to raise funds for particular purposes. They are borrowing money from the public and they will pay interest, on the other hand, we have equity - we have shares. Which is the risk capital of a company.

- Shareholders receive dividends and generally they’re in the form of cash. Sometimes the dividends can be in the form of more shares.

• When we talk about shares, we talk about dividends. • When we talk about term deposits or money in the bank or some other sort of government bond we call that

interest • and when we’re talking a bout real assets as in non-monetary form we’re talking about rents. !!

Earning interest on your money!Interest can be earned in two ways: 1) Some investments are sold on a discount basis. – Investment sold for a price lower than redemption value. - – Difference between sales price and redemption value is the amount of interest earned.

eg: NZ Treasury Notes Treasure notes are an issue of the government and they are of short term in nature. They might be of 90 day tenor (i.e. you buy it today and get paid back in 90 days time). But they are sold at a discount, therefore it might have a face value of $1000, and will be paid out on the 30th of june for example - but you can pay just $950 when issued. Therefore you can see is that you get interest of $50 between now and the 30th of June - but it will only be paid on this 30th of June.

- Most instruments are sold with a coupon - there is an interest factor that says we’ll pay for every say, 6 months or any quarter, whatever the interest rate is applicable to that financial instrument. And so you pay the face value which is $1000 and they will just keep paying you interest until such time as they repurchase the bond and you get your $1000.

- This too is just another opportunity to add to your investment portfolio. The more we go out in time the less certain we are of what’s going to happen. Therefore why might these short term treasury notes be of interest to people? And if you are unsure about the future; you could take a short term horizon in terms of your investments.


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- How does the share price relate to the index of the top 50 companies? - the index rises but the WH shares relative to the index is less.

- Shares in part of a portfolio are part of the longer term horizon - and what sort of people are interest in a long term horizon and who’s short; and compare to his horizon which is of shorter length than any of ours. This is because by the time we get to kiwisaver he’d be dead. !!

2) Other investments offer direct payment of interest to a ‘savings’ account. ! !!

Nominal: is the stated rate and is generally in terms of a per anum rate/period rate. !Effective: annualised rate. i.e. talking about the issue of compounding; if you are owed money (you have your deposits in the bank) would you prefer the interest calculated monthly or quarterly; monthly, as you want interest on the interest. !If you’re owed money you want it sooner rather than later; and if you

owe you’d rather not pay it at all. !We can see that we can convert a nominal rate into an effective rate because of compounding because we are ably to earn interest on interest and so the more frequently it is calculated the more it is compounded and the greater the FV will be. i.e. if interest is compounded more frequently than one time a year the effected rate is always going to end up being greater than the stated nominal rate. Conversely, if you’re borrowing you want interest calculated less frequently (you pay less). ! !!!!

Effective rate: investing 1k at 5% 5% is the nominal rate for a year; Calculation: we have 1k, 5% for half the year, giving 25 dollars, and a total of 1025 and another 5% for the other half on the 1025, giving more interest on the interest - giving in total $50.63 annual interest - which is better than just getting 50 bucks as you would from compounding interest for just a single year. -the nominal rate is 5% -but the effective rate is 5.063% !!! !!!!!!!!


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Appendix a is made up of all those relationships for different r’s and m’s !0.05 is the 5% divided by 2 (half a year), and to the power of 2. !Use the tables in the test. !!!If someone says the interest rate is 12%, but if it’s calculated at the end of each other month this means that the effective rate differs from the stated rate. !!!

How much interest will you earn?!The amount of interest earned depends on: • Frequency of compounding • Balance on which interest is paid • Interest rate applied Time value of money concepts are used to calculate interest earned. !Module 4!Making car and housing decisions - it is a mindset, it is a way of managing expenditures and investments. - can be applied to more than just a car !Buying a car! • Research purchase thoroughly, considering the market and your needs. • Select the item most suitable. • Negotiate the best price. • Arrange favourable financing. • Understand terms of sale before you buy. • Maintain and repair after you buy. !- you must do the research to understand what the market has on offer - what suits your needs? continually review

what needs are. Then negotiate the price. You have a very clear view of what your needs are, before entering into anything. Having a ‘list’ gives discipline to prevent impulsivity. !

Choosing a car!Factors to Consider: • Costs • Operating costs • New or used? • Size, body style, and features • Reliability and warranties • What to do with present car • Safety features • Insurance costs !- consider the costs - not just how much it takes to buy it but also how much it costs to manage it and maintain it

(operating costs). !!Page � of �31 36Theantay Keo

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The purchase transaction!• Comparison shop. • Discuss price first, not financing or trade–in. • Don’t pay the advertised price. • Check for special buyer’s incentives. • Negotiate for the best deal. • Be prepared to walk away. !- you cannot do enough comparison shopping - who will provide you with the best service and product for your needs?

Ask them what are the fees; thank you; go to the next. Make comparisons. Discuss the price first; but the most important point up there is the last one. Be prepared to talk away - this is what happens at auctions. Everyone else who was bidding before hand was prepared to walk away. Do not fall in love with it first-up; determine whether it fits your needs. But prior to walking away establish negotiations. Lower the price. Or make a deal such as where you pay some now, pay the rest in the future - this too is desirable. Because at least you could leave it in the bank and earn interest. !

Don’t put all your eggs in one basket - diversify. Develop resistance like the bacterial scum you are. !What is the value of a property at a successful auction? - the value is to only one person. Everyone else is an underbidder.

Lecture 9 !Meeting housing needs!• Single family home – Most popular type. – Offers more privacy and property control. – Cost has increased dramatically in recent years. • Benefits of owning a home

– Provides personal satisfaction – Own tenant– Acts as inflation hedge. !

Single family home is considered the most popular. Costs have increased majored in recent years. One of the major construction firms may be taken on by the commerce commission for some sort of action about pricing - i.e. they might be vertically integrated. They might be able to supply anything - and competition - perhaps they work together to keep prices up. (like countdown or New World who won’t price products). Homes may very well be a hedge against inflation - but there are no guarantees. !• Apartment – Can be flat, townhouse, or other building unit group title development. – Buyer receives title to an individual unit and jointly owns common areas. – Owner usually pays monthly body corporate fee in addition to mortgage payments. – Generally costs less than single family home.

- an apartment is on a piece of land - land is the most expensive part of any house purchase. - location location location !!!!!

How much housing can you afford?!• Location, location, location • Is the size suitable for your purpose • Size of mortgage • Kind of mortgage !


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The costs of home ownership:!1. Deposit 2. Bank charges and settlement costs 3. Mortgage payments 4. Rates and insurance 5. Maintenance and operating expenses !When we’re looking at these costs - consider how much we’d have to borrow. It doesn’t matter what you’re buying; determine what you need, what would fulfil your requirements; and then the costs and after-care services. !!1. Deposit!• Is your equity in the house • Is paid at time of signing sale and purchase agreement • Lender will determine amount required • Sometimes ‘mortgage insurance’ is required !

- The RB has come up with loan to value relationships. Not so long ago, as inflation was highly prevalent in NZ, the banks would lend you 100% of the value of the property. Then they would also pay for legal fees (conveyancing fees to the lawyers needed to transfer properties over to you). Times have changed, and due to pressure on house prices, the RB demanded there be a loan to value - which requires you to have a deposit (you need some equity) to put into the house, and that is what you call the equity in your house. Different from the equity when you look at financial statements.

- The equity in your house is the part you own. e.g. buying a house which is say $100k and you need 20% equity - need $20k. And the bank would therefore own $80k as they funded it. You enter into the contract and the lender will decide on the basis of the house how much they will lend.

- Mortgage insurance - when you have vehicles or assets you want protected you might take out insurance on that particular product. Whatever it might be, you may want to cover it from perils. When you’re talking about mortgage insurance you’re talking in terms of the life of the borrower, so that in the event of their demise the bank can turn to the insurance policy to repay the mortgage - the bank doesn’t kick out of the house the dependants. This gives security, and banks may actually need you to have an insurance policy on the life of the borrowers; so that not only is it security for you, but for the bank as well. !

2. Bank charges & Settlement Costs!• Application and documentation fees (effective rate of interest) • Settlement costs include title search fees, solicitors costs, valuation fees, inspection fees (leaky homes) and survey fees !

- Too many people forget about the add-on costs. These are negotiable. Shop around for lawyers - who suits your needs. It’s not just the price of the house alone that needs to be considered, one must also consider additional costs e.g. for lawyers etc !

3. The Mortgage Payment:!Comprises two parts: P - Principal I - Interest !

- We have two components when we pay back a loan - we pay back the principal, P (what we’ve borrowed) and the interest, I, on it. !!!!!!!


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Calculating the mortgage payment: Example • What will the monthly mortgage payments be (P&I) on a $100 000, 30– year, 7% mortgage

What particular activity are we talking about? Of all the things we’ve talked about thus far what is the language to describe this? - Annuity. !i.e. paying the same amount of money at the same frequency over a fixed period of time. !The monthly payment is $665.30. This is what’s given by the formula for the annuity. In the very early stages we’re paying off a small amount of principal. Therefore the white section is all about interest. Therefore in that first $665 we’re paying about $90 off the principal and the rest is in interest. Interest here is being compounded but the compounding each time is on a lesser principal because we’re gradually making some repayments of principal. It’ll take at the end of 30 years the last monthly payment

will be almost all principal and very little interest, because the interest is being calculated on the outstanding balance

Therefore what does that mean over the 30 years? There is 360 months (12 x 30) of $665 payments, means you would have paid $239,508. But you only borrowed $100k? - the difference is in interest; this is the truth of borrowing. !When people say house prices always go up, yes they do, but what might happen to your wealth? - you can see that at an interest rate of 7%, if house prices are online going up by 1% you might say it’ll take a long time to accumulate wealth. Therefore, is the house a worthy investment? - yes; due to reasons such as wanting to be in control of your own investment opportunities, and your house is an investment in the same way you may have a term deposit in the bank. !!Further Example • How much interest would be paid if you had Annual payments? - i.e. only one payment per year (making it at the end of each year). !

You would apply the same formula/tools applied in the previous example. Use the table (annuity table): appendix D !Therefore the annual payment needed would be = amount borrowed (principal) ÷ PVAF (Present Value Annuity Factor) !Same number of dollars; same frequency - and from the table, for n = 30, r = 7%, a PVAF is 12.409. !


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Therefore Annual Payment: !100k ÷ 12.409 = 8,058.67 !8,058.67 x 30 (years) = ~$242k !The interest paid is ~$142k (more than monthly payments) !

4. Rates & insurance!• Typically, homeowner to pay these expenses directly — rates to the local city or municipal council (plus water rates)

and insurance premiums to insurer of choice - need some perils insurance in the case of unforeseen events: for security for both parties involved. !

5. Maintenance & operating expenses!• May be greater for larger or older homes • Consider upkeep expenses: – Painting – Repairs – Lawn and garden maintenance – Fencing included !!The home-buying process!• Investigate the real estate market • Mostly it will be necessary to use a real estate agent

- Agents typically are employed by the seller (vendor) and are paid only if they make a sale - Commissions are calculated as a percentage of the sales price of the property (sometimes negotiated) !

- you want the house to be in a good state of repair. You must maintain the house. If you don’t the whole thing falls apart and the value depreciates. Oftentimes, house buyers do not go and knock on the neighbour’s door. We’ve already considered how trustworthy real estate agents are (who works for who, really? - conflicts due to different roles). Buyer beware.

- Commissions are all a function of the value of the property - selling a more expensive house = more $$$ for the real estate agent, for doing yet the same thing. !

Pre-qualify and apply for a mortgage.• Present a sales contract and a deposit. • Go through the settlement process. - Title check necessary to make sure property title is lien-free and to determine extent of mortgage interests. - Closing or settlement statement provides details of costs for both buyer and seller. !

- if you take more risk you would want more reward. Problem is with more risk is you could potentially lose all your principal. Don’t put all your eggs in one basket. Need a spread of investment opportunities.

- When we’re going through this process; prequalify for mortgage. - Remember again that this process is universal - for you as an individual and for entities like businesses !

Financing the transaction!• Shop around and compare various lenders for mortgage finance - Banks - Building societies - Credit unions • Mortgage brokers (eg. Mike Pero) - paying someone else to do your dirty work finding a good mortgage deal • Kinds of loans and payment options


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Types of mortgage loans!Fixed rate mortgage • Interest rate and monthly payments fixed for a term. • Balloon-payment mortgages are a type of fixed rate mortgage with large final payment. • Interest only.

- you will borrow at $X for a fixed period. Might not be for the whole life for the mortgage - could be for just some part. !

Variable rate mortgage • Interest rate varies, causing monthly payments to vary. • In most cases, where interest rates rise, so too do the repayments required. • Variation a function of OCR.

- Here, you must accept the rate of the mortgage for whatever the interest rate may be from time to time. When the RB increases the OCR - this means that the banks would also increase their interest for mortgages; whereas in a fixed rate mortgage this doesn’t occur. !!

Refinancing your mortgage!• It is possible to refinance your mortgage and may lead to a lower monthly payment if new rate is lower; • May be able to refinance with existing lender or by changing lender • If changing lender, may involve additional other costs on the new loan! !

- Happens all the time. you may come to a stage where you wonder if your lender (bank) is being nice to you. Therefore you can shop around and look for other lenders elsewhere. Banks have trades between clients - however, there are costs associated. Just because you have a mortgage for 30 years, doesn’t mean you’re stuck with the same bank for 30 years. You can jump ship.


Documents

Actg Test 1 Notes