BEFA - PPT - All Units-Converted - 7 PDF
BEFA - PPT - All Units-Converted - 7 PDF
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BUSINES ECONOMICES AND FINANCIAL ANALYSIS
B.TECH III AND V SEMESTER
(IARE – R18 AND R16)
by
Ms G. Joseph Mary, Assistant Professor, MBA
Ms. B. Tulasi Bai, Assistant Professor, MBA
UNIT-I
2
INTRODUCTION
3
Definitions of Managerial Economics
4
Features of Economics
Unlimited Scarce
wants resources
Alternati
Choice
ve uses
MICRO ECONOMICS
➢The study of an individual consumer or a firm is called
microeconomics ( also called the Theory of the Firm)
➢It deals with behavior and problems of single individual and micro
organization.
➢It concerns with the application of the concepts such as price theory ,
Law of Demand and theories of market structures and so on.
MACRO ECONOMIC
➢The study of ‘aggregate ‘ or total level of economic activity in a
country is called macroeconomics.
➢ It include national income analysis , balance of payments, theories of
employment, and so on.
➢It provides the necessary framework in term of government policies
etc.,
6
Nature of Managerial Economics
Close to micro
economics
Operate against
Interdisciplinary the backdrop of
micro economics
Offers scope to
evaluate each Normative
statements
alternative
Perspective
Applied in nature
actions
Scope of Managerial Economics
Traditional
economics
Theory of
Decision Operations
making Managerial Research
Economics
Statistics Mathematics
ELASTICITY OF DEMAND
10
Demand Analysis
Income Determinants of
Demand Quality
Expectations
about future Supply?
Tastes
Demand Function
Where
QDX = Quantity demanded of good X
Px = Price of the product X
Y = Level of Household income
P1…pn-1 = Price of all other related Products in Economy
T = Tastes of the Consumer
A = Advertising
Ey = Consumer expected future income
Ep = consumer’s expectations about future prices
P = Population
D = Distribution of consumers like age, gender,
income
U = refers to all those determinants which are not
covered
Individual Demand Function
Where
QDX = Quantity demanded of good X
Px = Price of the product X
Y = Level of Household income
P1…pn-1 = Price of all other related Products in Economy
T = Tastes of the Consumer
A = Advertising
Ey = Consumer expected future income
Ep = consumer’s expectations about future prices
U = refers to all those determinants which are not
covered
Law of Demand
Qdx = f ( p)
The Assumptions of Law of Demand
Where Expectation
there is a s of change Incase of
shortage of is the price ignorance
necessities of the of price
feared commodity changes
Commodities Geffen's
which are paradox
used as status
symbols
Elasticity of Demand
Price Income
Elasticity Elasticity
of Demand of Demand
Cross Advertising
Elasticity Elasticity of
of Demand Demand
Price Elasticity of Demand
Types of Price Elasticity
I) Availability of subsides
J)Expectation of prices
K)Durability of the Product
L)Government Policy
Significance of Elasticity of Demand
D. Forecasting Demand
E. Planning the levels of output
and price
ARC AND POINT ELASTICITY
ARC ELASTICITY
Techniques of Demand Forecasting
For forecasting the demand for goods and services in the long-run,
statistical and mathematical methods are used considering the past
data.
Trend Projection Method :
Definition: The Trend Projection Method is the most classical
method of business forecasting, which is concerned with the
movement of variables through time. This method requires a long
time-series data.
In predicting demand for a product, the trend projection
method is applied to the long time-series data.
There are five main techniques of mechanical extrapolation.
In extrapolation, it is assumed that existing trend will maintain all
through.
Fitting Trend Line by Observation (or, Visual me
Series Projection )
This method of forecasting trend is elementary, easy
and quick as it involves merely the plotting the actual sales
data on a chart and then estimating just by observation
where the trend line lies.
The line can be extended towards a future period
and corresponding sales forecast read from the graph.
62
THEORY OF PRODUCTION AND COST ANALYSIS
WHAT IS PRODUCTION
Production
63
Production Function
land
Product or
service
labour
generated
– value added
Capital
64
Production Function
Mathematical representation
of the relationship:
Q = f (K, L, La)
Output (Q) is dependent upon the
amount of capital (K), Land (L) and
Labour (La) used
65
Uses of Production Function
66
TYPES OF PRODUCTION FUNCTION
Types
Short –Run
(Inputs kept constant Long – Run
(Varying all inputs)
One input (Labour) is varied)
68
Production function with two variable input
69
ISOQUANTS
70
Features of isoquant
1.Downward sloping
2.Convex to origin
3.Do not intersect
4.Do not touch axes
71
MARGINAL RATE OF TECHNICAL SUBSTIITUTION
72
ISOCOSTS
73
COBB DOUGLAS PRODUCTION FUNCTION
P=bLaC1-a
Where p= total output
L=the index of employment of labour in manufacturing
C= the index of fixed capital in manufacturing
The function estimated for the USA by Cobb Douglas is
p=1.01L0.75C0.25
The production Function shows that one percent change in
labour input, capital remains the same, is associates with a 0.75
percentage change in out put, similarly one percent change in
capital labour remaining same is associated with 0.25
percentage change in output
74
Returns to sale & returns to factors
75
Returns to Factor
76
ECONOMIES AND DISECONOMICS OF SCALE
Internal Economies
Refers to the economies in production cost which accrue to firm alone
when it expand its output
Types of Internal Economies
(a)Managerial Economics
(b) Commercial Economics
(c) Financial Economics
(d)Technical Economics
(e)Marketing Economics
(f) Risk-bearing Economics
(g)Individual and Automated Machinery
(h)Economies of Larger Dimension
(i)Economies of Research And development
77
EXTERNAL ECONOMIES
1) Economies of concentration
2) Economies of R&D
3) Economies of welfare
78
DISECONOMIES OF SCALE
79
What is cost?
80
COST CONCEPT & TYPES
OPPORTUNITY COST –
81
ECONOMIC COST
This cost includes explicit and implicit cost both. In other words,
economic cost includes both recorded and unrecorded cost.
❖ EXPLICIT COST is the actual money expenditure on inputs or
payments made to the outsiders for hiring the factor services.
Example – wages paid to employees, payment for raw materials
etc.
❖IMPLICIT COST is the cost of self supplied factors . Example-
Interest on own capital ,Rent of own land etc.
❖The sum of explicit cost and implicit cost is the total cost of
production of a commodity.
82
ACCOUNTING COST
83
Incremental and Sunk Costs
84
Short Run and long run costs
85
TOTAL COST
87
MARGINAL COST
88
Cost-output Relationship
89
Cost-output Relationship In The
Short Run
90
Short Run can be studied in terms of
91
BEHAVIOUR OF COST IN THE SHORT- RUN
▪Total, average & marginal cost
93
Fixed cost & variable cost
94
Average Fixed Cost and Output
▪The greater the output, the lower the fixed cost per
unit, i.e. the average fixed cost.
95
The Break Even Analysis
96
KEY TERM USED IN BREAK EVEN ANALYSIS
➢FIXED COST
➢VARIABLE COST
➢TOTAL COST
➢CONTRIBUTION MARGINE
➢PROFIT
➢CONTRIBUTION MARGINAL RATIO
➢MARGIN OF SAFETY IN UNITS
➢MARGINAL OF SALES IN SALES VOLUME
➢ANGLE OF INCIDENCE
➢P/V RATIO
97
DETERMINATION OF BREAK EVEN POINT
98
DETERMINATION OF BREAK EVEN POINT IN
UNITS
99
DIFFERENT FORMULAS USED UNDER BEA AND
THERE APPLICATIONS
100
CONTRIBUTION RATIO
101
UNIT-III
MARKET &
NEW ECONOMIC
ENVIRONMENT
MARKET STRUCTURE
bep
PRICE DETERMINATION UNDER MONOPOLY
FOR SHORT RUN
• Sole Proprietorship
• Joint Hindu Family Business
• Partnership Firm
• Joint Stock Company
• 1.) Private Limited
2.) Public Limited
• Co-operative Society
SOLE PROPRIETERSHIPc
Characteristics:
• The business enterprise is owned
by one single individual (i.e. both
profit and risk belong to him)
• Owner is the Manager
• Owner is the only source of
Capital
• The proprietor and business
enterprise are same in the eyes of
the law.
ADVANTAGES OF SOLE PROPREITORSHIP
• Easy formation
• Better Control
(Prompt decision
making and
Flexibility in Operations)
• Subject to fewer regulations
• Not subject to corporate income tax
• Ownership of all profits
DISADVANTAGES OF SOLO ROPREITORSHIP
• Easy Formation
• Larger Resources
• Sharing Of Risk
• Better Management and
Flexibility of Operation
• No corporate income tax
• Subject to fewer regulations as
compared to companies
DISADVANTAGES OF PARTNERSHIPS
• Unlimited Liability
• Limited Life
• Difficult to raise
capital
• Chances of Dispute
JOINT STOCK COMPANY
1. PRIVATE COMPANY
•Closely held by a few people
•Minimum 2 and maximum 50 shareholders
•Stocks cannot be traded on exchanges and private
equity cannot be raised
•Less regulations as compared to Public Companies
2. PUBLIC COMPANY
•Stocks are held by a large
number of people
•Minimum 7 shareholders
and no limit for maximum
•Can be listed on stock
exchange and can go public
•Have to follow many laws
with regards to the board
composition and AGM.
CO-OPERATIVE SOCIETY
It is a voluntary
association of
people or
business to
achieve a an
economic goal
with a social
perspective
ADVANTAGES OF CO-OPERATIVE
• Easy Formation
• Limited Liability
• Stability
• Democratic
Management
• State Assistance
DISADVANTAGES OFA COOPERATIVE
• Possibility of conflict
• Long decision making
process
• Not enough capital
UNIT - IV
CAPITAL BUDGETING
Definition of capital
▪ To promote a business
▪ To conduct business operations smoothly
▪ To expand and diversify
▪ To meet contingencies
▪ To pay taxes
▪ To pay dividends and interests
▪ To replace the assets
▪ To support welfare programmes
▪ To wind up
Types of capital
Capital
Working
Fixed capital
capital
Features of fixed capital
Permanent in nature
Profit generation
Low liquidity
Amount of fixed capital
Utilised for promotion and expansion
Types of fixed assets
Definition:
Working capital is money available to a company for
day-to-day operations. It is also called as circulating
capital.
Simply put, working capital measures a
company's liquidity, efficiency, and overall health of
business.
Features of working capital
Definition of Budget:
Budgeting is a management toolfor planning and
controlling future activity.
Financial Buzz Words: A plan for saving, borrowing and
spending.
Budget is a financial plan and a
list of all planned expenses and revenues.
Capital Budgeting
168
Accounting
169
Definitions of Accounting
170
Accounting Concepts, Conventions, Bases &
Policies
The basic ideas, the theories on how and why certain
categories of transactions should be treated in a
particular manner. Once the theories have been
established and tested and proved to be acceptable,
the task of the Conventions is to set out the limit of
their applications.
171
FUNCTIONS / SCOPE OF FINANCIAL
ACCOUNTING
➢Recording
➢Classifying
➢Summarizing
➢Interpretation
➢Communicating
172
1. Deals with financial transactions : Accounting records only
those transactions and events, which are of a financial
character.
2. Recording : This is the basic function of Accounting. It is
essentially concerned with not only ensuring that all business
transaction of financial character are in fact recorded but also
that they are recorded in an orderly manner. Recording is
done in the book called “Journal”
3. Classifying : Classification is concerned with the systematic
analysis of the recorded data, with view to group transactions
or entries of one nature at one place .The work of
classification is done in the book called “Ledger
173
4. Summarizing : This involves presenting the classified data
in a manner, which is understandable and useful to the
internal as well as external end –users of accounting
statements. This process leads to the preparation of the
following statement :- Trial Balance Trading Account
Profit and Loss Account Balance Sheet
5. Analysis and Interpretation : This is the final function of
accounting. The recorded financial data is analyzed and
interpreted in a manner that the end-users can make a
meaningful judgment about the financial condition and
profitability of the business operations.
174
OBJECTIVES OF FINANCIAL ACCOUNTING
175
PROCESS OF ACCOUNTING
Recording Journal
Classifying Ledger
➢Owners
Internal Users ➢managers
➢employees
177
ADVANTAGES/ SIGNIFICANCE
OF FINANCIAL ACCOUNTING:
1. Replacement of memory
2. Evidence in court
3. Settlement of taxation liability
4. Comparative study
5. Sale of the business
6. Assistance to the insolvent person
7. Assistance to various interested parties
8. Preparation of Financial Statements
9. Decision Making
10.Planning and Control of Operations
11.Value of Business
178
LIMITATIONS/DISADVANTAGES OF
ACCOUNTING
179
DOUBLE ENTRY SYSTEM
MEANING:
180
PRINCIPLE OF DOUBLE ENTRY SYSTEM
181
ADVANTAGES OF DOUBLE ENTRY SYSTEM
1. Scientific system:
Double entry system records, classifies and
summarizes business transactions in a systematic
manner and, thus, produces useful information for
decision makers. It is more scientific as compared to
single entry of book-keeping.
2. Full Information:
Full and authentic information can be had about all
transactions as the trader maintains the ledger with
all types of accounts.
3. Assessment of Profit and Loss:
The businessman/trader will be able to know
correctly whether he had earned profit or sustained loss.
182
4. Knowledge of Creditors:
The trader is also knows the exact amounts owed by the firm
to others and he will be able to arrange prompt payment to
obtain cash discount.
5. Assessment of Financial Position:
The trader will be able to prepare the Balance Sheet which will
help the interested parties to know fully about the financial
position of the firm.
6. Comparison of Results:
It facilitates the comparison of current year results with those
of previous years.
7. Maintenance according to Income Tax Rules:
Proper maintenance of books will satisfy the tax authorities
and facilitates accurate assessment. In India Joint stock
companies should maintain accounts under double entry
system. 183
LIMITATIONS / DISADVANTAGES OF DOUBLE ENTRY
SYSTEM:
The Double Entry System however may not provide any
solution to the following errors.
1. Not Practical to All Concerns: This system requires
the maintenance of a number of books of accounts
which is not practical in small concerns.
2. Costly system: This system is costly because of a
number of records are to be maintained.
3. No guarantee of Absolute Accuracy of the Books of
Account: There is no guarantee of absolute
accuracy of the books of account inspite of
agreement of the trial balance because of there are
some errors like errors of principles, errors of
omission, compensating errors etc., which remain
understand inspite of agreement of trial balance.
184
4. Errors of Omission: In case the entire transaction is not
recorded in the books of accounts, the mistake cannot
be detected by accounting. The Trial Balance will tally
inspite of the mistakes.
5. Errors of Principle: Double entry is based upon the fact
that every debit has its corresponding credit and vice
versa. It will not be able to detect the mistake such as
debiting Ram‟s account instead of Rao‟s account or
Building account in place of Repairs account.
6. Compensating Errors: If Rahim‟s account is by mistake
debited with Rs. 15 lesser and Mohan‟s account is also
by mistake credited with Rs.15 lesser, the Trial Balance
will tally but mistake will remain in accounts.
185
PROFARMA FOR DOUBLE ENTRY SYSTEM
To By
Particulars Particulars
of benefits xxxxx of benefits xxxxx
received given
186
Classification of Accounts
Types of
Accounts
Personal Impersonal
Accounts Accounts
Real Nominal
Account Account
187
Personal Accounts
188
Artificial Personal accounts: Artificial Personal Accounts: These
accounts include accounts of corporate bodies or institutions
which are recognized as persons in business dealings. The
account of a Limited Company, the accounts of co-operative
society, the accounts of clubs, the account of Government, the
account of insurance company, the account of Colleges, Schools,
Universities and Hotels etc., are examples of Artificial Personal
Accounts.
189
iii)Representative Personal accounts: Representative Personal
Accounts: These are accounts which represent a certain person
or group of persons. For example, Outstanding expenses A/c,
Prepaid expenses A/c, Income Receivable A/c and Income
received in advance A/c, Drawings A/c and Capital A/c are
termed as Representative Accounts
190
Principle/ Rule of Personal Account
Example:
If cash has been paid to Raja, the account of Raja will
have to be debited since Raja is the receiver of cash.
Similarly, if cash received from Krishna, the account
of Krishna will have to be credited since Krishna is
the giver of cash.
191
Real Account
Fixed Assets: Those assets which are acquired for long term use
by the business concern are known as Fixed assets. For example
Land and Buildings, Plant and Machinery, Furniture and Fixtures
etc are called as Fixed Assets.
192
Current Assets: Those assets which are possible to convert into
cash are known as known as Current assets. For example cash
in hand, cash at Bank, Stock in trade, Debtors, Bills Receivable
etc., are called as current assets
Tangible Assets: Tangible assets are those which relate to such
things which can be touched, felt, measured etc., Tangible
assets have physical existence. Hence these assets may be
transferred from one place to another place. Fixed assets and
Current assets are the examples of Tangible assets.
Intangible Assets: These accounts represent such things which
cannot be touched. Of course, they can be measured interms of
money. Intangible assets haven't any physical existence.
Goodwill, copy rights, patents and trademarks are the
examples of Intangible assets
193
Principle/Rule of Real Account:
Example:
If machinery has been purchased for cash, is coming into
the business, while machinery account should be debited
since Machinery h account should be credited since cash is
going out of the business. If furniture is sold for cash, cash
account should be debited since cash is coming into the
business, while Furniture account should be credited since
furniture is going out of the business.
194
Nominal Accounts
195
These accounts are opened in the books to simply explain
the nature of the transactions. They do not really exist.
For example, in a business when salary is paid to the
manager, commission is paid to the salesmen, rent is paid
to landlord, cash goes out of the business and it is
something real, while salary, commission, or rent as such
does not exist.
The accounts of these items are opened simply to explain
how the cash has been spent. In the absence of such
information, it may be difficult for the cashier to explain
how the cash at his disposal was utilized. Nominal
accounts are also called Fictitious Accounts.
196
Principle or Rule of Nominal Account
197
The Accounting Cycle
198
The Recording Process
Transaction
Documentation Journal
Financial Ledger
Trial Balance
Statements
199
Journal
What is a journal?
• It is a list in chronological order of all the transactions
for a business.
1 Identify transaction from source documents.
2 Specify accounts affected.
3 Apply debit/credit rules.
4 Record transaction with description.
Journalizing
• Journalizing –
It is the process of entering transactions into the
journal
200
Journal entry
•Journal entry - an analysis of the effects of
a transaction on the accounts, usually
accompanied by an explanation of the
transaction
–This analysis identifies the accounts to be
debited and credited.
202
LEDGER
Date
Dr. Particulars F Amount Date Particulars F Amount Cr.
Rs Rs
To Rs. By Rs.
The Name Name of
of Credit debit
Account Account
203
TRAIL BALANCE
204
205