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Lecture 3

INFO 16029 Lecture Notes - Lecture 3: Cash Flow Statement, Variety Store, Financial StatementPremium

19 pages41 viewsFall 2017

Department
Faculty of Applied Science & Technology
Course Code
INFO 16029
Professor
Boom
Lecture
3

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Finance
Monday, February 6, 2017
Does anyone need to hand in a hard copy of your assignment still?
Sorry about last week that’s the first week I’ve had to cancel. We’re going to condense the
rest. There are some things I’m going to skip over, and I’d suggest that if I’m skipping over it,
don’t spend a lot of time studying it. If there is anything on the test that we don’t cover in class,
I will deduct that from your test. You shouldn’t be responsible for information we don’t discuss
in class, but I don’t think there will be anything like that. It’s heavily on what we have already
done, especially the KYC stuff.
We’re going through Unit 4, 5 and 7 – that is information that will be on the test.
Week 4: Unit 4 Economic Factors and Financial Markets
Review of financial Statements, Cash/Debt Management & TMV
- Cash flow statement income and expenses money coming in and going out
o Age, job, experience, type of job you do things like that will affect the cash flow
statement
- Personal balance sheet net worth statement what is that about?
o All the things you own and all the things you owe (loans), and what you have are
you assets (house, liquid, investment)
- Corporate statements related to personal statements
- Future and present value statements make sure you practice those again and make sure your
calculator is programmed properly. It’s a silly way to lose marks.
- Credit scores you can influence your own credit scores
What you will learn (slide)
(Reading slide)
Economic Indicators (slide)
You’ve probably heard of some of these before, but these three things are all leading indicators:
they tell us a lot about what is happening in the economy.
Gross Domestic Product (GDP) this calculates all the things we make in the country (it can be
services as well). It’s the final products. I have a video to show you how that is calculated.
You’re not expected to calculate the GDP – there are thousands of people that work together to
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calculate this. But when Stats Canada comes up with this figure for us, we need to know what it
means.
Annual Inflation Rate (CPI) ( also known as the Consumer Price Index) If we’re producing
more and creating a lot of stuff in the economy, what do you think is happening?
S: Lower unemployment.
T: Yes, but as we all get employed then, what is our access to money like? It’s better. You have
money coming in, so it’s a good thing. But as money is coming in, prices can go up. If you
owned a company and you’re selling widgets and everyone is making money, then you can
probably put the price up. That’s what inflation is about – the prices increasing and decreasing.
As GDP goes up, so too will prices. If GDP is going down, it means companies are producing
less, it means that they have less people on staff (probably layoffs or harder to get a job
generally). My hope is that GDP is high when you graduate. If GDP is going down, so too are
prices. If no one has any money, you cant sell your widgets for top dollar anymore.
Unemployment Rate the percentage of people that aren’t employed. Who is included in this?
People who are able and wanting to work. My dad is retired, and he isn’t seeking work, so he
isn’t included in this.
S: So how do they calculate it?
T: Stats Canada does it. There are surveys that go around, and there are videos on here that show
how it happens.
Some Important Links (slide)
Let’s look at how these are calculated.
[GDP Explanation Video]
This example had four different industries involved. There are many more involved. There is
someone who creates the tires, the rims, the wires, and so on. And that’s just one little company.
So we cannot calculate this ourselves, but we can use this information to help guide us in what’s
going to happen in the economy. As GDP is increasing, the economy is doing very well, and
when GDP is decreasing, the economy is slowing down.
[CPI Explanation Video]
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So CPI is measuring the price changes. You’ve heard her talk about adjustments on Pension
Plans and so on are people who are retired. When CPI/inflation increases, so does the
government pension. Most of us work in an environment where that doesn’t happen. You don’t
automatically get a raise because inflation went up.
CPI is really difficult to calculate. I think it would be the most boring job in the world you’d
go into stores and write down the price of everything.
Business Cycles (slide)
Our business cycle does go up and down all the time. I’ve done a little pictorial here to see the
wave pattern. In reality, the up times tend to be much longer than the recessionary times (they
don’t usually last more than 2 years, whereas expansion inflation usually happens for about 10
years and often longer). As we have this wave of economic activity, and the economy is
improving, what is happening to GDP? It’s increasing. Prices start to creep up. It’s particularly
near the top of the curve that this happens. Then we crest the curve, companies have been doing
really well, but suddenly, they are noticing that prices have increased so much that people aren’t
buying as much. Companies react pretty quickly when products aren’t selling. They cut back on
their production because they don’t want whole warehouses of stuff they can’t sell. They lay off
their employees or eliminate some positions altogether. When you have firms laying employees
off and creating less stuff, we can all be unemployed and searching for that one job. If we are all
competing, they don’t have to pay as much either, so wages start to decrease, and then prices
have to come down, too, because we don’t have as much to spend on stuff.
Then we turn the corner again, new businesses have great startup ideas and the whole cycle starts
again. GDP and CPI will increase, and unemployment will decrease.
[writing summary on the board]
During this first phase, what’s happening to GDP? It’s increasing. What’s happening to prices?
They're increasing! So what’s happening to unemployment? It’s decreasing. Now when we start
to hit the trough here what is happening? GDP is decreasing. Prices decrease and unemployment
increases. See how they're all connected? They all give us leading indicators to tell us what is
going on in the economy.
S: how do you know if we’re having a recession?
T: That is a great question, I wish you could determine that. But you can’t tell if it’s a recession
until it’s over, It’s 2 quarters down.
One other thing I want to talk to you about is that is the economy changes like this what
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