Finance

 

Most of the content below has been either directly quoted or slightly modified from “The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments”. Quotation marks and citations have been omitted for readability. I highly recommend it to anyone interested in understanding the inner workings of future Bitcoin Lightning Network implementations. Continue reading How Does the Lightning Network Actually Work?

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The U.S. national debt is a terrifyingly huge number, currently $19.9 trillion dollars and racing frantically to the $20,000,000,000,000 mark. If you were wondering whether it is going up at an unimaginable rate – wonder no more! In the mere 26 days between November 18, 2016, and December 14, 2016, the national debt rose by $97,769,384,008.

$98,000,000,000 in 26 days.

Continue reading National Debt Millennium

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There is a concept that it is the duty of policymakers to make laws that are not easily circumvented or whose purpose cannot be overshadowed by negative consequences of a strict application of the law. Unfortunately, laws with narrow legislative intent (that only address the concerns of a small portion of a larger population) often result in unintended negative consequences that affect other (previously content) populations.

Legislatures should be avoid changing general broad rules to address specific or anecdotal cases that are easily circumvented or whose narrow intent leaves others in a more vulnerable position.

A recent example of a law like this can be seen in the proposed Department of Labor regulations regarding overtime for salaried employees.

Current Rule:

Salaried employees who earn more than $23,660 a year ($455 a week) are ineligible for overtime even if they work more than 40 hours a week.

New Rule:

Raises the threshold to $50,440 ($970 a week) for ineligible status.

Employee Motivation(s)

This new regulation seems great at first!Overtime2

More hardworking salary employees will get paid for their overtime. The situation gets cloudier when you consider why people have jobs in the first place and their current primary motivator (income, personal satisfaction, or learning a valuable skill). It is extremely likely that every person will have jobs over their career where the primary motivator changes between the three pillars. Therefore, a law prioritizing one of these motivators (income) at the expense of another will act as a barrier for some people to find and keep what they deem to be meaningful work.

It is the right of every worker to place value on the aspects of employment that she considers the most important. This law would hinder that right.

Why does the concept of a “salary” even exist?

Stability (to employee) and consistency (across employees with same function).

A salary is the value based (vs. cost based) pricing model of the workplace. The company pays the employee for the value of the service she brings to the organization, not the cost for her to bring it.

It would breed extreme inefficiency (and illogical outcomes) in an organization if two managers who performed the same duties were paid under the new law. Inefficient manager (B) who worked 49 hours and received nine hours of overtime pay would be paid 34% more than the efficient manager (A), who gets her job done in 40 hours / week.

Overtime5

In this situation, manager B would surely be reprimanded to curb her extra hours or would be fired for her inability to efficiently perform the duties of the position. Meanwhile, the rest of the company, including the efficient manager A, has less capital to invest in the growth of the business and therefore less opportunity for success. This very sad outcome could have been avoided, but for the seemingly ‘reasonable’ law.

If this is a good system for people making a $50k salary, why doesn’t the same logic apply to a $150k salary?

In situations like this, benchmarking to a ‘reasonable’ number ($50k is neither too high nor too low) can lead you to say the policy is ‘reasonable’. This however would be a mistake. By replacing the reasonable number ($50k) with a less reasonable number ($150k), the policy’s effectiveness in accomplishing its intent is greatly diminished.

There are many people who make $90k or $130k per year salaries who work much more than 40 hours / week. Why don’t these people deserve the protection of the government? We all agree they don’t; but why not? It is probably because we all see these are skilled workers who likely need to work more than 40 hours / week to accomplish all they do. The way these people became skilled workers is by WORKING (many more than 40 hours / week). How do we expect the next generation of highly skilled and paid workers to progress if they cannot do so under their own value system?

By restricting people who must charge overtime to those under $50k salary, the law would actually hinder the long-term progress of those whom it seeks to help.

Opponent: If you want to work so bad, just waive your right to get overtime pay.

A waiver is likely a reasonable workaround for someone who actually values learning a valuable skill or the personal satisfaction of a particular job over overtime pay. However, if this type of waiver were allowed, it would completely undermine the intent of the law (to keep lower earners from being taken advantage of). If a waiver were allowed, bad companies would simply force encourage (overtly or covertly) employees to sign a waiver as part of their onboarding package and circumvent the entire law. This is the type of potential circumvention that legislators should avoid whenever possible.

Conclusion

Individuals should have a right to place value on their work experience as they see fit. This value could come in many forms including income, learning a valuable skill, or personal satisfaction depending on the life situation and future goals of the worker. Additionally, as shown by the example of manager B, affected workers can actually be hurt by being required to manage their time arbitrarily to 40 hours / week.

Links:

http://fortune.com/2016/01/06/overtime-lawsuits-rules/

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This passage is dedicated to simply understanding the Operating section of the Statement of Cash Flows (SCF).

Accounting at its core is a rule based science; the rules of which can be memorized. However, memorization is a terrible substitute for comprehension. Real understanding comes from recognizing the logic and context of why a rule exists instead of memorizing how to apply it.

With this in mind, there are few topics that cannot be condensed to a simple rational statement that informs the user of the rule and the logic behind why it exists.

“If you can’t explain it simply, you don’t understand it well enough.” – Albert Einstein

Accounting ‘rules’ are logical simplifications of how transactions or items should be presented to users of financial statements. The trick is to understand what should be presented and why.

Why Does the SCF Exist?

Most businesses operate under ‘accrual’ basis (as opposed to ‘cash’ basis) accounting.

One large difference between accrual and cash accounting is the existence of the ‘matching principle’ in the former. Under the matching principle, expenses are recorded when incurred, regardless of when payment is made for the associated product or service. In practice, this means that expenses are incurred when its partner revenue is recognized or when the associated service is consumed.

By utilizing the matching principle, accrual accounting financial statement users are able to make decisions using revenue and expense data that ‘match’ one another with regard to their associated costs of production.

The problem is that accrual based income statements, in isolation, do not inform the user of actual changes in a company’s cash position for a period.

This is why the SCF exists: to show the user how and why a company’s cash balances changed from the previous reporting period.

Let’s take it from the top…no, really!

At the top of any statement of cash flows (prepared under the indirect method) will be the company’s net income for the measurement period. This is where the Operating section begins.

Add Back Non-Cash Expenses

Depreciation (or Amortization)

Depreciation is the classic ‘non-cash’ expense. It is also a great example of the matching principle in action. Each capitalized asset slowly loses value and utility over time through wear-and-tear and obsolescence. Thus, depreciation was invented to allow companies to recognize this loss of value or expense as it occurs throughout the life of certain assets.

Ex: Imagine NewCo sold no shoes for the period, nor collected any money from customers. There is absolutely no ‘business’ going on within the company. Now assume NewCo owns one asset, a large mechanical press used to form shoe molds. This asset was capitalized several years ago and yearly depreciation is $100.

NewCo’s net income is ($100) however NewCo’s CFFO is $0 because yearly depreciation expense is added back to net income as a non-cash expense.

Subtract Net Increase in Working Capital

In the context of the SCF, we are primarily concerned with changes in net working capital – the period over period change in net working capital – as opposed to the net working capital figure itself.

The increase in net working capital will be subtracted from net income because a business that has increased/grown its net working capital has done so directly or indirectly by using cash.

Current Assets

The most common current assets relevant to CFFO are accounts receivable (AR), inventory, and prepaid expenses. As with depreciation, it’s easier to understand why the increases (decreases) in current assets are subtracted (added) from (to) the cash balance if we look at some simple examples.

Ex: NewCo again has no operations for the period. But, last period it had an AR balance of $70 and this period has a balance of $0. NewCo has collected money from a customer for a sale that was made and recognized in an earlier period. Here, it is pretty easy to see that this decrease in a current asset account should be added to CFFO because NewCo now has more cash than before.

Ex: Now suppose NewCo’s AR balance increased from $0 to $70 in this period. Here, NewCo did make a sale during the period which accounts for the increase in AR but the Company has actually financed this sale for their customer and collected $0. Because there was no cash collected, the net income of $70 must be reduced by $70 to show CFFO of $0.

Current Liabilities

The most common current liabilities relevant to CFFO are accounts payable (AP) and accrued expenses.

For current liabilities, the same logic as assets applies but to be sure you have the correct sign, think like Charlie Munger and “invert, always invert.” For example, if accrued expenses increased this period (from $0 to $20), your net expenses to be paid grew because you did not pay something. This is neither inherently good nor bad but it is a fact that your cash on-hand increased by $20 because you did not pay these expenses. Thus, your CFFO from the change in accrued expenses is +$20.

After sorting through each working capital item, you will reach a number for the net increase (decrease) in working capital. This value will be subtracted from net income and non-cash expenses to reach the CFFO.

Conclusion

Greater understanding of the operating section of the SCF can lead to better organizational and strategic management.

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