Question

1. What is the fundamental role of finance in the economy? What has been the focus of financial innovation from Shylock to the Medicis and to the current day (blockchains).
2. What is money? Why is it a belief? What does the mining of the “silver mountain” in Ascent of Money, convey about the intrinsic value of money?
3. What is the role of accounting in modern finance? How does standardization of what is measured and reporting help in transparency; information quality/reliability and governance?

Answer 1

What is the fundamental role of finance in the economy?

Although they are often taught and presented as separate disciplines, economics and finance are interrelated and inform and influence each other. Investors care about these studies because they also influence the markets to a great degree. It's important for investors to avoid "either/or" arguments regarding economics and finance; both are important and have valid applications.

In general, the focus of economics is more a focus on the big picture, such as how a country, region, or market is performing. Economics also focuses on public policy, while the focus of finance is more company- or industry-specific. Finance also focuses on how companies and investors evaluate risk and return. Historically, economics has been more theoretical and finance more practical, but in the last 20 years, the distinction has become much less pronounced.

In fact, the two disciplines seem to be converging in some respects. Both economists and finance professionals are being employed in governments, corporations, and financial markets. At some fundamental level, there will always be a separation, but both are likely to remain very important to the economy, investors, and the markets for years to come.

Finance

Finance in many respects is an offshoot of economics. Finance describes the management, creation, and study of money, banking, credit, investments, assets, and liabilities that make up financial systems, as well as the study of those financial instruments. Finance can be divided into three categories: public finance, corporate finance, and personal finance.

Finance typically focuses on the study of prices, interest rates, money flows, and the financial markets. Thinking more broadly, finance tends to center around topics that include the time value of money, rates of return, cost of capital, optimal financial structures, and the quantification of risk.

Finance, as in the case of corporate finance, involves managing assets, liabilities, revenues, and debt for a business. Businesses obtain financing through a variety of means, ranging from equity investments to credit arrangements. A firm might take out a loan from a bank or arrange for a line of credit—acquiring and managing debt properly can help a company expand and ultimately become more profitable.

Personal finance defines all financial decisions and activities of an individual or household, including budgeting, insurance, mortgage planning, savings, and retirement planning.

Public finance includes tax systems, government expenditures, budget procedures, stabilization policy and instruments, debt issues, and other government concerns.

A degree in finance is a common denominator among many of those who work on Wall Street as analysts, bankers, or fund managers. Likewise, many of those employed by commercial banks, insurance companies, and other financial service providers have college backgrounds in finance. Apart from the finance industry itself, a degree in finance can be a pathway to senior management of companies and corporations.

Finance involves assessing the value of financial instruments, such as the determination of fair value for a wide range of investment products. Finance includes the use of stock-pricing models like the capital asset pricing model (CAPM) and option models like Black-Scholes. Finance also includes determining the optimal dividend or debt policy for a corporation or the proper asset allocation strategy for an investor.

It can also be argued that finance affects the markets with a seemingly constant stream of new products. Although many derivatives and advanced financial products have been maligned in the wake of the Great Recession, many of these instruments were designed to address and solve market demands and needs. For example, derivatives can be used to hedge risk for investors, hedge funds, or large banks, thus protecting the financial system from harm in the event of a recession.

Economics

Economics is a social science that studies the production, consumption, and distribution of goods and services, with the aim of explaining how economies work and how their agents interact. Although labeled a "social science" and often treated as one of the liberal arts, modern economics is in fact often very quantitative and heavily math-oriented in practice. There are two main branches of economics: macroeconomics and microeconomics.

Macroeconomics is a branch of economics that studies how the aggregate economy behaves. In macroeconomics, a variety of economy-wide phenomena are thoroughly examined, such as inflation, national income, gross domestic product (GDP), and changes in unemployment.

Microeconomics is the study of economic tendencies, or what's likely to happen when individuals make certain choices or when the factors of production change. Just as macroeconomics focuses on how the aggregate economy behaves, microeconomics focuses on the smaller factors that affect choices made by individuals and companies.

Microeconomics also explains what to expect if certain conditions change. If a manufacturer raises the prices of cars, microeconomics says consumers will tend to buy fewer than before. If a major copper mine collapses in South America, the price of copper will tend to increase, because supply is restricted.

Macroeconomics can be applied in tracking GDP, inflation, and deficits to help investors make more informed decisions. Microeconomics could help an investor see why Apple Inc. stock prices might fall if consumers buy fewer iPhones. Microeconomics could also explain why a higher minimum wage might force a company to hire fewer workers.

What is money? Why is it a belief? What does the mining of the “silver mountain” in Ascent of Money, convey about the intrinsic value of money?

Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The main functions of money are distinguished as: a medium of exchange, a unit of account, a store of value and sometimes, a standard of deferred payment.

Money is an economic unit that functions as a generally recognized medium of exchange for transactional purposes in an economy. Money provides the service of reducing transaction cost, namely the double coincidence of wants. Money originates in the form of a commodity, having a physical property to be adopted by market participants as a medium of exchange. Money can be: market-determined, officially issued legal tender or fiat moneys, money substitutes and fiduciary media, and electronic cryptocurrencies.

Understanding Money

Money is commonly referred to as currency. Economically, each government has its own money system. Cryptocurrencies are also being developed for financing and international exchange across the world.

Money is a liquid asset used in the settlement of transactions. It functions based on the general acceptance of its value within a governmental economy and internationally through foreign exchange. The current value of monetary currency is not necessarily derived from the materials used to produce the note or coin. Instead, value is derived from the willingness to agree to a displayed value and rely on it for use in future transactions. This is money's primary function: a generally recognized medium of exchange that people and global economies intend to hold as and are willing to accept as payment for current or future transactions.

Economic money systems began to be developed for the function of exchange. The use of money as currency provides a centralized medium for buying and selling in a market. This was first established to replace bartering. Monetary currency helps to provide a system for overcoming the double coincidence of wants. The double coincidence of wants is a ubiquitous problem in a barter economy, where in order to trade, each party must have something that the other party wants. When all parties use and willingly accept an agreed-upon monetary currency, they can avoid this problem.

In order to be most useful as money, a currency should be: 1) fungible, 2) durable, 3) portable, 4) recognizable, and 5) stable. These properties ensure that the benefit of reducing or eliminating the transaction cost of the double coincidence of wants is not outweighed by other types of transaction costs associated with that specific good.

Fungible

Units of the good should be of relatively uniform quality so that they are interchangeable with one another. If different units of the good have different qualities, then their value for use in future transactions may not be reliable or consistent. Trying to use a non-fungible good as money results in transaction costs of individually evaluating each unit of the good before an exchange can take place.

Durable

The physical character of the good should be durable enough to retain its usefulness in future exchanges and be reused multiple times. A perishable good or a good that degrades quickly with use in exchanges will not be as useful for future transactions. Trying to use a non-durable good as money conflicts with money's essentially future-oriented use-value.

Portable

It should be divisible into small quantities so that people appreciate its original use value highly enough that a worthwhile quantity of the good can be conveniently carried or transported. An indivisible good, immovable good, or good of low original use-value can create issues. Trying to use a non-portable good as money could produce transaction costs of either physically transporting large quantities of the low value good or defining practical, transferable ownership of an indivisible or immobile object.  

Recognizable

The authenticity and quantity of the good should be readily ascertainable to the users so that they can easily agree to the terms of an exchange. Trying to use a non-recognizable good as money produces transaction costs of agreement on the authenticity and quantity of the goods by all parties to an exchange.

Stable

The value that people place on a good in terms of the other goods that they are willing to trade should be relatively constant or increasing over time. A good whose value varies widely up and down over time or consistently loses value over time is less suitable. Trying to use a non-stable good as money produces transaction costs of repeatedly revaluing the good in each successive transaction and the risk that the exchange value of the good might drop below its other direct use-value or not be useful at all, in which case it will no longer circulate as money.

Functions of Money

As stated above, money primarily functions as a medium of exchange. However, it also has developed secondary functions that derive from its use as a medium of exchange. These other functions include: 1) a unit of account, 2) a store of value, and 3) a standard of deferred payment.

Unit of Account

Due to its use as a medium of exchange for both buying and selling and its use to assign prices to all kinds of other goods and services, money can be used to keep track of the money gained or lost across multiple transactions and to compare money values of various combinations of different quantities of different goods and services mathematically. This makes things such as accounting for profit and loss of a business, balancing a budget, or valuing the total assets of a company all possible.

Store of Value

Because money's usefulness as a medium of exchange in transactions is inherently future-oriented, it provides a means to store value obtained through current production or trade for use in the future, in the form of other goods and services. In particular trading their non-fungible, non-durable, non-portable, non-recognizable, or non-stable goods or services for money here and now, people can store the value of those goods to trade for goods at other times and places. This facilitates saving for the future and engaging in transactions over long distances possible.

Standard of Deferred Payment

To the extent that money is accepted as a general medium of exchange and serves as a useful store of value, it can be used to transfer value for exchange use at different times between people through the tools of credit and debt. One person can loan a quantity of money to another for a period of time to use and repay another agreed-upon quantity of money at a future date. The stored value represented by the loaned money is transferred from the lender to the borrower in exchange for an agreed quantity of stored value in the future. The borrower can then use and enjoy the value of other goods and services that they can now purchase in exchange for payment at a later date. The lender in effect is able to loan the current use of real goods and services, which he does not himself originally possess, to the borrower. The sellers of the goods are able to receive payment for their goods now instead of loaning the goods directly to the borrower in hope of future return or repayment.

Types of Money

There are several types of money.

Market-Determined Money

Money originates as a feature of the spontaneous order of markets through the practice of barter (or direct exchange), where people trade one good or service directly for another good or service. In order for a trade to occur in barter, the parties to the exchange must want the good or service that their counterparties have to offer. This is known as the double coincidence of wants, and it sharply limits the scope of transactions that can occur in a barter economy.

However certain goods in a barter economy will be generally desired by more people in trade for whatever they have to offer in barter. These tend to be goods that have the best combination of the five properties of money listed above. Over time these special kinds of goods can come to be desired in trade partly for their wide acceptance, as a means to overcome the problem posed by the double coincidence of wants in future transactions with others. Eventually, people can come to desire a good mostly or solely for its use-value in reducing transaction costs in future exchanges.

Such a good can then be called money because it is generally recognized by participants in the economy as a valuable good for its use as a medium to indirectly exchange other goods and services between multiple parties. The physical commodity will still have some other use-value, but the primary use of any source of value has in the market is for its use as money. Historically, precious metals like gold and silver were adopted as these kinds of market-determined moneys.

Legal Tender and Fiat Money

Sometimes a market-determined money is officially recognized as legal money by a government. Under some circumstances, goods that do not necessarily meet the five properties of optimal market-determined money outlined above can be used to fulfill the functions of money in an economy. Typically this involves a legal mandate to use a specific good as money (known as a legal tender law) or some kind of prohibition on the use of money (such as the use of cigarettes as a medium of exchange among prison inmates). Legal tender laws specify a certain good as legal money, which courts will recognize as a final means of payment in contracts and the legal means of settling tax bills. By default, the legal tender will typically be used as a medium of exchange by market participants within the political jurisdiction of the authority that declares it to be money.

The term fiat money or fiat currency is generally associated with a classification of money that has been authorized for use by a country's government.

Legal tender laws do not always adopt market-determined money as legal tender. A new medium of exchange that does not serve any original non-money use as an economic good can be imposed to replace market-determined money by legal declaration. This type of legal tender can also be called fiat money. Fiat money becomes a medium of exchange through legal imposition on the market, rather than through the process of adoption by the market for easing transactions. Fiat money often does not meet the general characteristics of money and the market-determined money that it replaces. Because the fiat money tends to be less suitable for use as money, market participants may be reluctant to adopt it as money. Prohibitions (or even confiscation) of market-based money are sometimes enacted as part of legal tender laws that impose fiat money on an economy.

Fiat moneys can lead to increased economic transaction costs, market distortions, and unintended consequences to the extent that they do not meet the characteristics that make a particular good suitable to serve as money. For example, in modern times, most countries' legal tender moneys consistently lose value over time, sometimes rapidly, leading to the social costs associated with inflation.

Governmental currencies fall under the category of fiat money. Internationally, the International Monetary Fund and World Bank serve as global watchdogs for the exchange of currencies between countries. Governments establish their own money system which is monitored primarily by the central bank and Treasury authorities. A governmental currency will have an intranational value and an international value. Established governmental currencies trade 24 hours a day seven days a week on the foreign exchange market, which is the largest financial trading market worldwide. Governments can establish formal and informal trade relations to peg currency values to one another for reduced volatility. Governmental currencies may also be free-floating.

Money Substitutes and Fiduciary Media

Physical units of currency (cash) can circulate from hand to hand in the course of economic transactions or by being reassigned from person to person for accounting purposes while being held on deposit at a bank or similar institution. In the second case, tokens or paper notes that substitute for and represent the deposited money are passed from person to person in daily transactions and settled later by financial institutions. Paper notes and checks are examples of these kinds of money substitutes. The use of money substitutes can increase the portability and durability of money, as well as reducing other risks. Money substitutes enhance the function of money by allowing people to simultaneously enjoy the use of their money in day-to-day transactions while also keeping the money secure from theft or physical damage.

Normally, however, banks issue a larger (often much larger) quantity of money substitutes than the amount of physical currency entrusted to them by depositors. By simultaneously issuing money substitutes corresponding to the same units of physical money to both the depositors and borrowers to whom the bank makes loans, in a process known as fractional reserve banking, banks can dramatically expand the supply of money available for transactions beyond the available supply of physical money. The new money substitutes that do not correspond to new units of physical money are called fiduciary media of exchange since they exist solely as entries in the accounting and financial system of the banks. Though widely accepted today, the use of fiduciary media has been controversial. Some economists believe that the (over)issuance of a fiduciary is to blame for business cycles and economic recessions, while others welcome it as a means to allow the expansion of money supply to suit the needs of the economy.

In the U.S. the Federal Reserve and the Treasury Department monetary several types of money supply for the purpose of regulating and mitigating monetary issues.

Cryptocurrencies

Cryptocurrencies are peer-based money, such as bitcoin. This type of money is electronically based on electronic accounting entries that can be used as a medium of exchange. Cryptocurrencies share many characteristics of both market-determined money and fiat money.

Cryptocurrencies are a type of money that can be used to facilitate international transactions.

Cryptocurrencies first originated as accounting units assigned to users as compensation in return for helping to process and verify transactions in a cryptocurrency blockchain. They have also evolved to become a new form of coin offering that helps to serve as financing for new technological business initiatives and companies. Cryptocurrencies are becoming more widely used and adopted as a medium of exchange for daily transactions. However, cryptocurrencies do pose many risks. As such, they are being researched and regulated by authorities on an ongoing basis.

What is the role of accounting in modern finance? How does standardization of what is measured and reporting help in transparency; information quality/reliability and governance?

What is the contribution of Financial Accounting to the different sectors of economy

INTRODUCTION

The purpose of accounting is to provide the information that is needed for sound economic decision making. The main purpose of financial accounting is to prepare financial reports that provide information about a firm’s performance to external parties such as investors,creditors,and tax authorities. Managerial accounting contrasts with financial accounting in that managerial accounting is for internal decision making and does not have to follow any rules issued by standard setting bodies. Financial accounting, on the other hand, is performed according to Generally Accepted Accounting Principles(GAAP) guidelines.

Financial accounting

Financial Accounting is the field of accountancy concerned with the preparation of financial statements
for decision makers, such as stockholders, suppliers, banks, employees, government agencies, owners, and other stakeholders.

ROLE OF FINANCIAL ACCOUNTING

The role of accounting in business is to help interested parties, both internal and external, to make business decisions. The accounting process consists of measuring and summarizing business activities, interpreting financial information, and communicating the results to management and other decision makers.
Financial accounting generates some of the key documents, including profit and loss account showing the method of business traded for a specific period and the balance sheet which provides a statement showing mode of trade in business for a specific period.
Without these financial documents it would be impossible to run the business or to make decisions regarding the business.

The accounting process consists of measuring and summarizing business activities, interpreting financial information, and communicating the results to management and other decision makers.
Management accounting also motivates managers and other employees towards achieving organizational goals. A well motivated staff performs better and is more productive. Organizations are able to achieve their goals if employees are well motivated.
Financial accounting generates some of the key company documents, including profit and loss statement or P&Ls. P&Ls show the financial details of a business over a specific period. Financial accounting also produces the balance sheet which provides a snapshot of a business’s assets, debts, and equity at a specific moment in time.. Financial accounting also helps the managers in the business to manage more efficiently by providing them views of financial information which may include monthly management reports presenting costs and profits against budgets, sales, or other key metrics. Reporting can be customized for the specific needs of the business.
Without these financial documents it would be very difficult to run the business or to make decisions regarding the business.