Monthly Archives: March 2013

What is monetary policy?

Monetary policy is a key factor that has power to influence the direction of a certain nation’s economy. Actually it determines that what amount of money will flow within the economy. This policy maintains the activities of an economy by controlling the credit and money supply of that particular country. Federal Reserve has ability to control this policy by changing rate of interests and the amount of money that the banks must possess in their reserves. These powers of Federal Reserve have been clearly defined in the Act of 1993 and from the advent of this act the importance of this policy has increased to a great extent.

According to the Federal Reserve Act, the monetary policies are actually designed for the sake of encouraging more employment, stabilizing the prices and moderating the interest rates and it has been observed that when these monetary policies are being implemented rightly then they result in stabilized prices and the wages. This stabilization helps in having an economic growth ultimately. The role of US monetary policy is quite impressive not only in economy but also in the consumer making decisions too. The consumer decisions can be buying a house or a car, expanding their business etc.

Monetary policies are actually determined by the Board of Governors of Federal Reserve system and Federal Open Market Committee. It is necessary to discover the perfect balance while setting this policy. It is a common thinking that monetary policies are similar to the fiscal policies but they are not. These two policies can be used to control the economy but in a detailed context they are separate. Fiscal policies are made by the federal government and they refer to tax and other spending schemes.

Tools of monetary policies?

A Federal Reserve can utilize different tools while setting these monetary policies. These tools include the open market operations, reserve requirements and the discount rate. The FOMC is primarily responsible for the open market operations whereas the discount rates and the reserves requirements are maintained by the Board of governors.

Open market operations are regarded as the most common and flexible way of imposing the monetary policies.  These operations include the selling and buying of the government securities in the open market. When we talk about US banking system, we come to know that in US these operations contract or expand money. When a federal fund rate is low, it motivates the consumer spending due to low interest rates and thus an economy progresses. But when the rate is high then the people get discourage and they spend less so as a result the economy gets slow. When the changes in the federal fund rates occur, they effect the investment and the foreign exchange rates too.

The second tool that is exercised to set this policy is the discount rate. This rate is charged by the Federal Reserve from the other banks on borrowing the money. High rate depicts a restraining policy and the low rate shows an expansive policy. The third tool is known as reserve requirement. This is considered as amount of cash that is required to maintain by all commercial and saving banks, US branches and the agencies of different foreign banks as reserve all the times.

Financial Accounting Definition – Basic Concepts

Basic Concepts Of Financial Accounting :-

Financial accounting is actually meant to keep the records of financial transactions related to certain business operations in the ledgers. These financial transactions reveal the actual state of working of a company to the corned investors, company owners and business owners. Financial ratios are being exercised on the records to know the real standing of business. If a difference is found in the statement or if the accounting records do not comply with the actual inventory and cash account then a company should essentially scrutinize its business operations so that the differences can be eliminated. Some basic financial accounting concepts are as follows:

Types of Accounting:

Cash accounting means a type of accounting that is based on only cash transactions. For example a trader who is used to sell his lamp on credit and he will not account for that particular sale until he gets the cash. Accrual accounting is opposite to the cash accounting. In this method transactions are recorded immediately when they happen. A trader who utilizes this method, he records each and every transaction quickly even if he has not got the payment.

What is Balance sheet?

The assets that can be transformed into cash during a year are called Current assets. Account receivables, checks and the money orders fall in this particular category. While the assets that do not fall under the head of current assets, they take more than a year to get transformed to cash like furniture, buildings etc. financial obligations of a company come under the head of liabilities like bills. Liabilities can be current or long term. The amount of money invested by the owner in the business is called Owners equity and the sum of owner’s equity and total liabilities should be equal to the total assets on the statement of balance sheet.

Why income statement is created?

Net sales refer to the total number of sales that are made by the company within an accounting year. Cost of goods show that how much money has been spent by the company to prepare the goods. The gross income reveals the total money that a company earned within an accounting year. The expenses that have no direct connection in making the goods are known as selling general and administrative expenses. Income that is produced by the company from its operations is called operating income. The profit before tax is known as the Income Before Tax and when the tax is being deducted then it is called Income After Taxes. Net Income is the key motive behind it.

What is Cash Flow Statement?

This statement shows how the cash enters and leaves the different business operations. Cash movement is actually traced through the operations, investing and the last one is financing. This statement is quite handy for judging the cash flow in the business operations.

What is time frame?

Different types of financial statements are made either on quarterly basis or on annual basis and 4 quarters fall in a financial year. So, it is a time frame with in which different statements are being prepared.

Monetary Unit – What is stable monetary unit concept?

Each and every accountant is needed to plan some important conceptual suppositions when he has to present a report of financial or monetary information. These suppositions are necessary for making a financial report because they contain value. It is said that it is beneficial to know and review these assumptions when you want to check some financial statements. A lot of suppositions come under the head of modern accounting and the concept of stable monetary unit is amongst them.

1.      Basic concept of monetary unit:

The core concept of stable monetary unit is that the value of dollar will remain the same over time. So, this concept actually permits the accountants to overlook the results of inflation. On the basis of this supposition, we observe that the old financial documents are not revised even though the worth of money often gets changed. It is important to exercise this concept but this concept can create some severe problems if currency deflates or inflates rapidly and it can be quite problematic.

2.      Application of monetary unit:

If we look in to this concept in our routine matters then this concept is different and it means that accountants utilize the records from the separate periods. If the inflation occurs even then the values of different accounts or buying are not being adjusted. The balances get changed by including new buying to the old ones and it is supposed that the money value had remained the same. A purchase that happens after the inflation will appear expensive in the documents. And this difference actually arises only because of the decreased buying ability of the dollar. So, it is permitted to use a nonstop accounting record for a certain period of time for the sake of practical feasibility.

3.      Precautions:

It has been experienced that although monetary unit suppositions make the things easy for the accountants but they also creates many problems too.  If it happens that the money value changes rapidly due to certain market conditions or policy then the financial documents become less effective for making comparisons with the past records. If the accountants do not make adjustments in the accounts or statements according to the inflation and deflation then accounting record would become ineffective to disclose the true financial position of a business. So this core issue discloses a link between the routine accounting and the extensive market trends.

4.      Policy repercussions:

The role of policy is quite important in maintaining and retaining the currency’s buying power and this role is suggested by the concept of the stable money unit. Jerry Jordon who belongs to the Federal Reserve Bank states that the federal banks and the governments should try their best to save the steady currency. This is because prices give some sound information about expenses of the different services and goods for the business and household purposes. Whereas other professionals say that a policy cannot be effective if the money value is depending on some tangible resources for example gold. It does not whatever the case is; the business people should keep in mind the possible effects of changes in the buying power of dollar while evaluating the past performance and the documents.

Financial Ratios – Five Common Financial Accounting Ratios!

A single variable cannot be attributed for measuring the market value of a certain business. It is an art to calculate the value than a science. Bankrate.com states that a bank daily utilizes more than 150 ratios to check the financial position of a business. So it is always advisable to get the services of a qualified and good accountant to accomplish the task of the ratios analysis in a perfect way. But it is necessary for the business managers to have the detailed working knowledge of this financial ratio so that the business decisions could be taken easily. The five common financial ratios of accounting are illustrated below.

  1. Quick ratios:

In accounting, quick ratios mean a ratio that measures the financial liquidity of a business. It helps in learning that how easily a business can transform its assets into cash so that it could cover its liabilities. A company with the low quick ratio shows more risk for the investors. This ratio is calculated by reducing the inventory from the current assets and then the assets are being divided with the total liabilities of the business.

2. Current ratios:

This ratio is quite similar to the quick ratio and it is a trend to use this ratio for checking the liquidity of the business too. The investors prefer to use this ratio with the quick ratio. This ratio is simply calculated by dividing the current assets of a certain business with the current liabilities. This is easy to calculate like a business that possesses $2million as his current assets and $500,000 as his current liabilities then its current ratio will be 4.

  3. Return on Asset ratios:

It is a phenomenon that the investors and the managers realize the market value of their business on the basis of profit that it produces. ROA ratio is being utilized to check the profitability of the business. This ratio is obtained by dividing the net income of a particular business for a given period of time with the standard total assets. It helps in understanding the factual profitability of the business at some given period of time.

  4. Inventory Turnover ratios:

Companies that deal in the sale of some products, they rely on the regular sale of these products to produce the profit. So in such case the financial position of a business wholly depends on its own inventory turnover. This ratio is also easy to calculate and it is not so problematic. It is figured out by dividing the total sales of that particular business in a year with the value of the average inventory. In this way, the ratio puts the answer in front of you.

  5. Day’s Receivable ratios:

The liquidity of a business can be checked in another way. You can check it by having the information that how many days a company requires to have payments from its clients. This is also regarded as the day receivable ratios. It is calculated by dividing the net annual sales by the average gross receivables that is divided by the 365 or (365/Net Annual Sales/Average Gross Receivables)

Financial Accounting Vs Managerial Accounting

Financial accounting report is one that is prepared for the facility of some outside parties like creditors and share holders while the managerial accounting report is being prepared for the people of inside organization like managers. This contrast helps us in creating the major and basic differences between the financial accounting and the managerial accounting. Although these two type of accounting rely on the same financial information. These two accounting types also distinguish themselves from one another in many ways. These are different in the emphasis of past and the future, the form of data that they convey to the users and in many other ways. You will find these differences in more detail in the following paragraphs.

1.       Future is the focus:

The important task of a manager’s job is planning and managerial accounting needs a solid future orientation whereas financial accounting facilitates with the summary of the past monetary transactions. This summary can be beneficial for the planning but to a limited extent. The future cannot be the reflection of the past. Changes are the part and parcel of economic conditions and a manager’s job requires a planning that should be based on the estimates instead of the summaries of past.

2.       Significance of data:

Financial data is always needed to be objective whereas for the inside use, the managers require the relevant information whether it is objective or not. Relevance here means that the information must be useful for problem solving like it is hard to verify the expected sales volume of a store but this is the information that is quite handy for managers in taking their decisions. It is necessary that the managerial accounting information system must be elastic.

3.       Precision is less important:

Timeline is important for managers than precision. In a case where immediate decision is necessary, a manger would believe on estimate instead of waiting for any precise answer. Precision is always costly when it is associated with time and resources. So, in financial accounts precision has more importance than the managerial one.

4.       Segments are focus of an organization:

In financial type of accounting, reporting is done for the whole company whereas in managerial kind one or more segments of the company are being focused. Any segment can be selected by the management that it deems useful. In financial field segments have the secondary importance whereas in managerial, segments have primary importance.

5.        GAAP are as follow:

In financial field statements are needed to be prepared in compliance with GAAP that is generally accepted accounting principles. External users need this assurance that they have been made by bothering some common rules whereas in management, it is not a condition. Management can emphasize on the facts that are not considered in the GAAP.

6.       Managerial accounting is not mandatory:

It is necessary to conduct the accounting of finance because it is mandatory whereas in the case of management accounting it is not mandatory.  SEC and the tax department require the financial documentation so it is important to prepare the records of financial transactions.

What is currency devaluation?

The method of evaluating the value of a country’s currency is when it is compared against the value of other countries’ currency. When it is decided to decrease the value of the monetary units of a company, this is called the devaluation of currency. So this causes the stronger currencies to buy more of the devalued currencies.

It is a common thinking that money is just utilized to buy the things. Most of us do not pay attention to a fact that money can be purchased too. Different types of currencies are found in this world and each currency has its own distinct value from the other when it is being compared. Here we can take an example like 1 US dollar may balance the 7 South African rands. So if a person decides to take 1 USD to South Africa then he would get 7 rands in exchange. And if South Africa takes a decision of currency devaluation then perhaps a person can get more or perhaps 10 rands in exchange because the currency would become cheaper.

On the other hand, currency devaluation can be explained in such a way that the devalued currency will be capable to buy limited amount of expensive currencies. For example if a person wants to exchange the South African rands for US dollar after the currency is devalued then he would not even be able to get a full dollar. He may receive some cents only when he would try to exchange.

It is necessary to distinguish between the depreciation and devaluation. When a currency gets depreciated it drops its value too. The basic difference is that the decision of devaluation is taken by the government and the value is decreased intentionally whereas depreciation is a separate case.

Devaluation of currency may take place too due to the inappropriate reserves of foreign currency. It mostly happens when a country purchases its extra currency with the help of stronger foreign currencies. When the supply gets short of such stronger currencies and a country does not like to spend its currency reserves, the deadlock happens. It is often considered that devaluation of currency is a key to recover its currency by utilizing low foreign currency.

Devaluation of currency is a phenomenon that paves way for so many effects. It has deep and ever lasting impact on trade and it is a quite serious and attention seeking aspect. It is a trend that when the currency of a country devalues then the commodities and goods of that particular country becomes less expensive for those countries that have strong currencies. This point can generate positive things if the purpose behind this devaluation is to produce revenue.

Negative effects of devaluation of currency on trade can also be seen too. If you weaken your currency it means that the products of those countries that are having strong currency are becoming more expensive.  So, the countries with the cheap currency have to control and restrict its imports to control this haphazard situation.

Trading Derivative – Who Regulates Derivative Trading?

Derivatives are truly considered the financial contracts that have been created in a pattern to show leverage and it is a method that allows you to have a great investment by utilizing some very little money. It also facilitates in alleviating the risk just as do the policies for insurance. Contracts for derivative are complicated enough to understand. It often happens that the investors feel helpless and they find it hard to know the amount of investment and the nature of risks involved in such type of investment. Both the government agencies and the private institutions exercise their rights to regulate the derivative contracts. It is done in order to regulate reliability of the respective market.

Process of recognition/identification:
Derivatives in fact are the securities that determine the respective prices from a fundamental asset and we can understand it through an example. If there is a stock option contract, it will be a derivative because it draws its price from the stock and on which the contract has standings. When we talk about other orders or commands then there are commodities futures. Commodities futures are the contracts that are formulated for the purpose of making deliveries of the commodities like wheat, gold etc. for future. Many other complicated financial instruments are also found like default exchange/swap on credit.

  • Institutional directives:

Cato.org claims that the financial trading for derivatives has to pass the three regulation stages. These regulations are governed by the clandestine monetary institutions, the CBOE and the brokerage firms which make trading happen. First of all, the private regulating institutions have to decide that what trading actions are permitted. Once it is decided then they conduct activities to make these trading possible by carefully following the rules that they have established. Private regulators exercise their power to make sure the worthiness of a derivative market and they perform this activity by examining the reliability of the involved institutions.

  • Exchange and Security Commission:

SEC that is known as security and exchange commission is a governmental institution of the USA. This works for making the financial markets reliable and ensure their integrity. It is also responsible for the derivative. SEC makes rules so that the element of corruption and fraud could be removed and the faith of the people in such markets could be retained. It also works to ensure that no manipulation or illegal activities are taking place in the market and everything is going very well.

  • U.S Futures and Commodities Trading commission:

This is a government organization which works similar to the SEC and its functions are almost similar to the SEC. It works to ensure and regulate the stock option derivatives but it also governs the future contracts of the commodities too. Future contracts are those that relate with the delivery of the commodities in the future like the delivery of wheat or gold. Futures and Commodities Trading Commission also regulates and governs the actions of commodity exchange including Chicago Mercantile Exchange and the CBOE. So, it clearly demonstrates who regulates the derivative trading.

What Is A Monetary Unit?

Monetary unit is one that is considered a value or quantity of a particular currency. This is regarded as the first complete value and the units of lower value can be explained as the partial denomination of this main unit. When we look at U.S. we come to know that the money unit of U.S is dollar. The other countries and the nations have their own different units definitely like the euro, yen etc. The element of the unit of money differs vividly among the nations and it is true no doubt.
If a country owns a fundamental monetary unit then this unit creates the stability for an economic system. It can be utilized for the sake of reference point for different prices and values no doubt. It actually provides the market a meaning of value or defines that what the value is. For example, if the cost of a sandwich is $5 then the value of this particular sandwich can be measured by understanding the unit of money. Whether you think the price of that sandwich is expensive or not, we have to understand this with the existing level of inflation and the supposed value of sandwich.

The concept of unit is not a constant concept at all. Some experts who calculate the inflation report that the purchasing power of a person in 1900 of $100 U.S would level the purchasing power of a person of $2500 U.S in 2009. Actual money unit did not get changed. It is the purchasing power that changed greatly due to the different factors and inflation is included in these factors. This is the reason due to which a unit of money gives a sound definition of value.
It does not happen in the reality that the currency would be issued only equal to the basic or actual unit. This is the reason due to which currency systems normally introduce variety of values of a currency that may be regarded as the multipliers or the fractions of the basic or actual primary unit. When it is talked about the British pound authenticity, the fractional values involve 1, 5, 10, 25 and 50 pence. These are the fractional divisions of a pound. This unit has the multipliers like $20 dollar bill makes it easier to carry and utilize the huge cash.
A unit of money is not a unit only, it makes it possible to define and bond a specific nation. When the form of currency is same among nations then it provides ease in trade and it also helps to avoid the complicated problems of foreign exchange rates. Some economic professional have a view that a globally accepted unit of money should be because it will make the worldwide trade more easy and convenient. A few nations like United Kingdom claim that its currency owns a unique and different part of country wise character. It has utilized different opportunities to have connection with the extensive European system of currency. So, this article clearly demonstrates what a monetary unit is.

Financial Derivatives – Start Trading Right Now!

There are many people who have deep knowledge about the stock market and its working but they will definitely agree on a point that derivatives world is a different world that paves way for many new challenges and it teaches many ways for making money. Stock derivatives can be in different forms but it is essential that these derivatives will establish a contract between the stock holding party and the investor who shows his interest in buying that stock at some later date. Derivatives can be purchased with the help of brokerage firms or you can even create your own derivative too. It depends on you what do you want. When the question arises about how to trade the stock derivatives then you have to follow the certain set of instructions. These instructions can guide you in a better way and these are as follows:

  1. First of all you are required to open an account of investment with a firm (brokerage firm). You can open this account online or in your specific area, it depends on your accessibility and feasibility. You have to make some home work and research about the firm that is going to give you brokerage services, to make certain that whether it transacts in stock derivatives or not. This research will help you in avoiding any fraud.
  2. Whether you have to buy few or many stock derivatives, you have to get in touch with your firm for it. Do contact with the firm and inquire them if there is any feasibility of buying the derivatives in stock in which you feel your interest. Brokerage firms that do the activity of derivative trading that will definitely prepare a contract of derivatives by charging some fee.
  3. A variety of derivatives are found in the markets that one can obtain like futures, warrants, and options etc. Stock option actually provides a right to an investor to buy some certain stock share at some future date on the striking price. Even they can agree to buy at the price that existed on the point of the option purchased. Warrant is alike option but it is sold directly. A future may demand the stock purchase in some future time but it is obligatory for the buyer to purchase the share. A forward stock is also similar to future derivatives but it confines the future trading to cash and stock only.
  4. You can sell the derivative contract for stock to the interested investor through brokerage firm. It often happens that selling a derivatives is much easy than short selling the stocks. This is a written contract and it is not bound with the stocks at all.
  5. You can sell your derivative stock just penning a call that you already have on stock. When you write a call then you automatically enter into a contract with an investor so that your shares at the striking price can be sold in future. Calls can be covered or uncovered. You must chat about the options with the firm before writing a call and they will charge fee for making your transaction complete.

What Are Foreign Currency Derivatives?

The foreign currency market is the world’s largest and the biggest market no doubt. Forex exchange is often known as Forex or FX. Both terms are quite common for foreign exchange market. When we look at this market, it becomes clear that the market itself is based on trading the different currencies. We can take some example like U.S dollars are exchanged for Euros. This market is also involved in trading the currency derivatives. Currency derivatives are the financial instruments that are based on the foreign currency.

What is a Derivative?

Derivatives are the financial instruments that do not possess a value themselves like currency notes. But their value resides on the value of something else like a stock, bond etc. So in reality, derivative is based on some other unit and its value and it has no value itself.

 Types of Derivative Strategies in the Foreign Exchange Market:

In foreign market, the currency derivatives are based on two main strategies. These contracts basically facilitate the traders to hedge or speculate. Speculation takes place when a trader claims or bets that a particular currency will decrease or rise and he agrees upon a contract to buy or sell the particular amount of the currency at some specified time in future. And hedging is exercised to reduce the risk by the traders. For example, a trader can buy a foreign currency A to counterbalance the risk of having only foreign currency B. So, the potential losses from one currency may be offset against the gains of the other.

Options:

Foreign currency strategies are actually pursued with the help of two ways and the first way is call an option. Options can be defined as the right to buy and sell the specific amount of money at some previously defined prices. A trader has a right to buy that option from the market and he may or may not use it by considering the trends of the market. For example, a trader who has purchased an option to sell the foreign currency A at $10 and after buying that option the price of that currency dropped to $5 then will have right to sell it at $10. This is because he had purchased an option from the market already. So in this way the trader will gain the benefit.

Future Contracts 

The second method through which the derivatives are being utilized in the foreign exchange market is known as the Future contracts. A futures contract demands that a trader has to deliver a specified amount at some specific date. So the difference between the option and the futures contract is that options are willingly whereas futures contract are obligatory. An example can illustrate futures contract in a better way. If a trader provides his consent to sell a foreign currency for example that is A at a price of $20 in two months then he has to do this. He cannot refuse whether the price of the currency falls or rises because he has provided his consent already.