Accounting & Economics For Business 7 November

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ECONOMICS FOR BUSINESS

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ECONOMICS FOR BUSINESS

Dr. T.K. Jain.

AFTERSCHO☺OLCentre for social entrepreneurship

Bikaner M: 9414430763

[email protected]

www.afterschool.tk, www.afterschoool.tk


What is an indifference curve?

• Suppose I can buy two goods from some money and get equal satisfaction – there is a point where I am indifferent between them – (purchasing any of these will give equal satisfaction) - A curve with collection of locus of all such points is called indifference curve. This curve can be plotted in production function also (various combination of capital and labour that give you equal production).


What is break even point?

• The point where there is no profit no loss is called break even point


P of Faridabad sent out goods costing Rs. 45000 to Goti of

Bikaner at cost + 33%,1/10th of goods were lost In transit. 2/3rd of

the goods received are sold at 20% above price. The amount of

sale value wilt be;

• Cost of goods sold = 45000*9/10*2/3

• =27000. Print price = 27000+1/3 = 36000

• 20% above print = 36000*1.2=43200(ans).


Debit balance as per Cash Book of ABC Enterprises as on 31.3.2006 is Rs. 1,500.

Cheques deposited but not cleared amounts to Rs.100 and Cheqes issued but not presented of Rs.50. The bank gave interest amounting

Rs.50 and collected dividend Rs. 50 on behalf of ABC Enterprises. Balance as per pass book

should be


Solution

• 1500 -100 +50 +50 +50

• =1550 answer.


Solve it

• A, B and C were partners in firm sharing profits and losses in th ratio of 2:2:1 respectively with the capital balance of Rs. 50,000 for A and B, for C Rs. 25,000; C declared to retire from the firm and balance in reserve on the date was Rs. 15,000. If goodwill of the firm was valued as Rs. 30,000 and profit on revaluation was Rs. 7,050 then what amount Will be transferred to the loan account of C?


Share of C

• Capital 25000

• Goodwill 30000*1/5 = 6000

• Reserve = 15000*1/5 = 3000

• Revaluation profit = 7050*1/5 = 1410

• Add these = 35410 will be transferred to C’s loan account.


In the previous question question, what will A get if he retires?

• Capital = 50000

• Goodwill 30000*2/5 = 12000

• Reserve = 15000*2/5 = 6000

• Revaluation profit = 7050*2/5 = 2820

• Add these = 70820 will be transferred to A’s loan account.


The total cost of goods available for sale with a company during the

current year is Rs.12,00,000 and the totai sales during the period are

Rs.13,00,000. if the gross profitmargin of the company is 33 % on cost, the closing inventory during

the current year


Solution

• Total sales = 13 lakhs

• Cost of this sale = 13 lakh * 100/133

• =975000

• Thus closing stock is 1200000-975000

• =225000 answer.


Consider the following data pertaining to Goti Ltd. for the month of March 2005:

ParticularsAs on March 01, 2005 (Rs.) As Stock 1,80,000 & on March 31, 2005 (Rs.)

90,000The company made purchases amounting Rs. 3,30,000 on credit. During the month of March 2005, the company paid a sum of Rs.3,50,000

to the suppliers. The goods are sold at 25% above the cost. The sales for the month of

March 2005 were


Solution – stock account

• Opening stock 180000

• Purchase 330000

• Closing stock 90000• Goods used in

manufacture = • 420000


Solution

• Sale = cost of goods sold + Gross profit

• 420000 + 25%

• =525000

• Thus sale was Rs. 525000


Bhuwanesh Audi Ltd. dealer in second-hand cars has the following five vehicles of different

models [ in their stock at the end of the financial year 2004-2005: what is stock?

• Cost : • Fiat 90,000• Ambassador1,15,000• Maruti

Esteem2,75,000• Maruti 800

1,00,000• Zen 2,10,000

• The net realisable value were :

• Fiat 95,000• Ambassador 1,55,000• Maruti

Esteem2,65,000• Maruti 800

1,25,000• Zen 2,00,000


Solution

• We shall take lower of cost & realisable value to compute the cost:

• Fiat 90,000• Ambassador1,15,000• Maruti Esteem2,65,000• Maruti 800 =1,00,000• Zen 2,00,000• Total stock = 770000 answer.


Solve it

• On May 01,2003. Goti Ltd. Issued 7% 40 lakh convertible debentures of Its. 100 each at a premium of 20’ Interest is payable on September30 and March 31. esers sear. The interest runs from the date of issue, the amt. of interest expenditure debited to profit and loss Account for the year ended 2004 will be:


Solution

• Interest will be charged for 11 months.

• 40,00,000 *11/12* 7/100

• =256666 answer.


Study the production possibility curve below. X axis is for consumer goods, capital goods is denoted by

Y axis.


Which points in PPC represent equal production?

• A,B,C,D


Which points in PPC represent highest production?

• W


Which points in PPC represent lowest production?

• U


Which is the equilibrium point?


Solution

• Q == because this is the point, where highest indifference curve touches the budget line.


In the graph,which indifference curve shows least satisfaction?


Solution

• IC 1


If a consumer’s income increases, which ICs will he touch?


Solution

• The consumer will shift from IC3 to IC4 and then to IC 5.


Which is the budget line? What will happen, if income decreases and

price of X also decreases?


Solution

• Budget line is YL.

• The point L will not shift much. But the point Y will shift toward below and the budget line will shift below.


What is FII?

• Foreign institutional investors

• They invest money in the secondary market – in stock markets etc.


What is private placement?

• When a company directly sells its equity to an investor, it is called private placement.


What is book building?

• The process by which shares of a company are given support by another company is called book building. The company which undertakes book building, tries to ensure that the shares don’t fall below certain level.


Which is this – demand curve or supply curve?


Solution

• Supply curve


What is PPC?

• Production possibility curve


What is labour mobility?

• Labour is one of the factors of production (the other factor is capital). When the labour is able to move from one place to another, it is called labour mobility.


In the following case, there is shift in a curve, identify the reason of

shift?


Solution

• Supply has decreased. Answer.


What is basis point?

• In international markets, when firms go to raise funds, they get loan at LIBOR + basis point. For example, if interest rate is LIBOR + 300 basis point, and LIBOR is 5, then the rate of interest is 5.3%.

• These basis points show change from LIBOR (London Inter Bank Offered Rate).


When does the law of increasing return end?


Solution

• As you can see there are three stanges:

• 1. increasing returns

• 2. constant returns

• 3. decreasing returns

• The law of increasing returns ends at point N. answer.


what is GDP, and how is it measured?

• GDP= Gross Domestic Product.• There are 3 ways to measure it: 1. Calculate total earnings of every one and

sum it up.2. Calculate expenses of each individual in

the nation and sum it up.3. Identify total production of goods and

services in the nation by each unit and sum it up.


What is utility and what is its impact?

• Utility is the benefit that a consumer derives from consuming some product or service.

• Utility reduces with each unit of consumption• There are 2 concepts regarding utility : • 1. Cardinal utility – the utility can be

measured• 2. ordinal utility – utility cannot be measured.


What do you understand from diminishing marginal utility?

• Utility reduces with each additional unit consumed. Thus diminishing marginal utility means the utility will reduce with each unity being consumed.

• Marginal utility means the utility derived from one additional unit consumed.


What is the relation between demand & supply regarding factors

of production Real wage, W/P

Income, output, Y

Price level, P

Income, output, Y

Labor, L Labor, L

W/P1

W/P2

L 5 Ld(W/P)

L2L1

Y2

Y1

Y 5 F(L)

L2L1

P2

P1

Y 5 Y 1 a(P 2 P

e)

Y2Y1

1. An increase in the price level . .

3. ...which raises employment, . .

4. ... output, . .

5. ... and income.

2. .. . reduces the real wage for a given nominal wage, . .

6. The aggregatesupply curvesummarizes these changes.

(a) Labor Demand (b) Production Function

(c) Aggregate Supply


What are the factors of production?

• There are many, some of them are : 1. Labour2. Capital3. Technology4. Entrepreneurship

We generally take only 2 factors while doing analysis : these are 1. capital 2. labour


What is short run and what is long run?

• Short run is the period in which we cannot increase the capacity of the plant. Long run is the period in which we can increase or decrease the capacity of the plant and also install or close a plant.

• In short run only one factor can be changed – labour – other factors are constant

• In long run both labour and capital can be changed. Plant capacity be altered.


What is bank rate ?

• The rate at which the central bank ( RBI in the case of India or FED bank in the case of the USA) gives loan to other bank is called bank rate.


What is PLR?

• Prime lending rate – it is the rate at which a bank gives loan to prime customer. Prime customer means the customer, whose economic conditions are very good and who is credit worthy.


What is CRR & SLR?

• CRR = cash reserve ratio (it denotes the ratio of cash held by banks against the deposits)

• SLR = statutary liquidity ratio (it denotes the ratio of investments in government and approved securities by the banks).


Suppose the total deposits are 1 lakh crores in India – RBI reduces CRR by 1%, what will happen?

• 1% of 1 lakh crore = 1000 lakh crores. Thus liquidity in the market will increase by 1000 lakh crore Rupees – as bank will be able to give more loans and will be able to give money easily. Due to ease in liquidity, the industry will benefit as it will be able to get more funds easily. However, inflation may increase due to this.


Which is called banker of banks or banker of last resort?

Central bank (RBI in India).


What is liquidity?

• Availability of cash / cash equivalent is called liquidity.


What is sensex?

• It is index of stock prices based 30 selected scrips. These 30 scrips are those which are selected on the basis of market capitalisation & business volumet.

• It is presented by BSE (Bombay stock exchange).


What is NIFTY?

• It is index of stock prices based 50 selected scrips. These 50 scrips are those which are selected on the basis of market capitalisation & business volumet.

• It is presented by NSE (National stock exchange).


What is NPA?

• Non performing assets –in banks, the major assets are loans given to companies / units / people. Some times some loans become overdue - those loans (assets) which are not performing – means not making regular payments of their outstanding amounts are called NPA.

• NPA word is used for banking industry.


What is CAC?

• Capital Account Convertibility.

• When foreign exchange is converted into capital account freely even in capital account, it is called capital account convertibility.

• Capital account here mean money raised for capital projects / investment purpose etc.


What is LC?

• Letter of credit, = when a bank gives loan against export documentation, it is called LC. For example, if you export some goods, the buyer send you acceptance of the bill and the bank of the buyer gives guarantee, then your bank can give you loan agains these documents. This is called LC.


What is packing credit?

• When you have received an order from an importer for some goods and you want to make goods as per the order, then you may take packing credit from the banks. In packing credit the bank gives you loan for purchasing raw material, and other working capital expenses. It is given for period till exports are sent – later LC is given.


What is forex reserves?

• Foreign exchange reserves of a country is called forex reserve.

• It will increase in following cases : If FDI will increase, FII will invest more money and exports will increase, increase of tourists to your country, repatriation of money by NRIs (non residents Indians),


What is IRS?

• INTEREST RATE SWAP

• Banks use these instruments to minimise their risks.


What is ALM?

• Asset liability management – banks try to match the cash flows of cash inflow and cash outflow through ALM. They try to match their assets and liabilities.

• Banks’s assets are its loans

• Bank’s liabilities are its deposits

• Matching them is called ALM.


What is hedging?

• When banks use various instruments like swaps, options etc. to reduce their risk exposure it is called hedging.


What FCD?

• Fully convertible debentures.


What is market capitalisation?

• No. of shares multiplied to the market price per share.

• For example, the share of reliance is quoted at Rs. 1250. suppose there are 100 shares in the market. The market capitalisation is 125000.


What do you understand from reverse mortgage?

• In mortgage, a person goes to bank and puts his land / building as mortgage to obtain loans (humge amount simultaneously) from bank and then he used to repay it in long time. In reverse mortgage, the bank gives land / building to the other person and gives money also on monthly basis and takes back the land / building after long time. (many old age persons are resorting to this option for maintaining their living)


What is microfinance?

• Raising small deposits (let us say Rs. 10 per month) – pooling this money together and Giving loan in very small amount (let us say Rs. 2000) so that a person may start a micro-enterprise – and can become self dependent. It is very successful business model –as has been proved by Gramin Bank and SEWA.


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Accounting & Economics For Business 7 November

Economy & Finance

sum of rs

dividend rs

capital balance of rs

capital goods

solution stock account

solution sale

consumer goods

th of goods