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Key Topics
Requirement
Question 1
(a) Explain the three classifications of production and give examples of each classification
(b) Explain opportunity costs and give examples
(c) Explain the purpose and evolution of the UK standard industrial classification (SIC) since 1948
(d) Explain with the use of two (2) separate diagrams, the shift in the demand curve and the movement along the demand curve
(e) Explain the income and substitution effect of an increase in price.
Question 2
(a) Explain two types of markets and give examples of each
(b) Define a public good and give examples of public goods
(c) Explain the three ways in which government intervenes in the market and give examples
(d) Explain the four key macroeconomic policy objectives that governments typically pursue.
(e) Explain the circular flow of income including the inner flow, withdrawals and injections.
Question 3
(a) Define and give examples of each of the four major areas of finance
(b) Explain the determinants of market interest rates including the various types of risk premiums
(c) Explain the four basic financial statements, including formats and purpose.
Solution
Financial & Economic literacy for managers
Introduction
In this present paper, we will analyze the impact of Financial and Economic Literacy on Managers. In the first phase, we will describe the classification of production, opportunity cost, evaluation of UK standards, demand curves and income and substitution effect. In the second phase, we will explain types of markets, public goods, four macroeconomic policies and the circular flow of income. In the third phase, we will describe four areas of finance, determinants of market interest rates, formats of four basic financial statements, ratio analysis from the financial statement of 2014. In the last phase, we will describe the importance of capital budgeting, use of NPV technique, yield curve and the selection of projection among the two projects.
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Q1.
a. The production is defined as the process of converting the input into output. Following are the three classifications of production process:
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1. Job production: In this process, non-standardized products are produced according to the orders received from the consumers. The machines and equipment are designed in such a way that they can suit according to the requirements of a particular job (Jonsson et al., 2015). For example: Stationary machinery layout.
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2. Batch production: It is defined as the process in which repetitive production of goods take place, and the order is received in advance. The job production is similar, but the quantity varies. For example: Motor Manufacturing, Tinned food.
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3. Flow production: It is defined as the process of manufacturing in a lot of standardized products. The flow of production is continued and progressive. For example: Manufacturing of cars.
b. Opportunity cost is defined as the potential benefit which is given up by choosing one option over another. It is not allocated in the books of accounts but takes an important role in decision making for selecting the project. It is a cost of choosing another option between two or three options. The opportunity cost can be explained in terms of time, mechanical output and others. It is the cost of missing an opportunity. For example The raw material purchased can be purchased from two suppliers, company A and B. The cost of purchasing from A is $10,500 and from B is %10,300. Then, the opportunity cost of purchasing from A $100 in about B. The owner’s decision of purchasing from A will consider the cost of lost opportunity to save $100.
c. The UK standard industrial classification was introduced in the UK in 1948. The purpose of classification is to divide the business establishments and other statistical units on the basis of economic activities in which they are engaged (Jones et al., 2013. The framework of classification provides tabulation, presentation, collection and analysis of data in monetary terms.It is evaluated by a hierarchy of five digit system. The UK SIC is divided into 21 sections, and each is denoted by the single letter from A to U. The letters are uniquely defined by next breakdown. The divisions are divided into three digit groups then into four digit classes and again into subclasses if required.
d. The demand curve is defined as the curve which represents the demand for a particular goods and services on a particular price. The graphical representation of demand curve includes the price on Y-axis and quantity on the X axis. Following is the use of shift in demand curve and movement along the demand curve.
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Shift in demand curve: It is used to determine the change in consumer’s preference. If the consumers are satisfied and interested in buying the product on the prevailing price then the demand shifts to the right. Similarly, if the consumers are not satisfied with the product at a prevailing price, then the demand shifts to the left. The factors which affect the demand curve include the change in consumer’s preference, expectations, change in trend, income, and others.
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Movement along demands curve: The moving demand curve takes place by changes in price which affect the demand due to which movement takes place along with the curve. It is used to check the demand for change in price.
e. The increase in price has two effects which include income and substitution effect.
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Income effect: The income effect is used to determine how much increase in demand will decrease the demand for goods and services.
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Substitution effect: The increase in demand forces the consumers to choose alternative goods. The effect measures how much increase in price affects the consumers to select alternate goods.
Q2.
a. The market is defined as the place in which different parties are engaged in exchange for money. Following are the two types of markets:
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Monopoly market: It is defined as the market in which there are a single seller and a large number of buyers. The producer has control over a price. There is no competition in a market, and the profit margin is high because the entry and exit are restricted. For example: Federal Trade Commission.
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Monopolistic market: It is defined as the market in which there are a large number of buyers and sellers. The goods produced are differentiated by different marketing strategy which includes advertising. For example: soap and detergent business.
b. Public good is defined as the goods which can be consumed by an individual without affecting its availability for others. It is consumed by the society as a whole, and it is financed by tax revenues. It is also known as non-rivalrous and non-excludable. For example Public parks.
c. Government intervention is defined as the regulatory action which is taken by the government through interference in the decision making of an organization or individual relates to the social and economic matters. Following are the three ways through which government intervenes in the market:
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Government intervention through rental market: The government can intervene through the culture of renting for accessing accommodation. For example: The 54.1 percent of households in Germany are renters due to the intervention of government in the marketplace.
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Government intervention through housing: The government can intervene through providing housing facilities. For example House and development, the board provides approximately eighty percent housing in Singapore.
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Government intervention through Multi-person housing: The low demand can be attained through limiting the size of a population and underlying the demand for houses. For example: In Australia, the multi-house system encourages the government intervention.
d. Following are the four macroeconomic policy objective which is perused by the government:
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i. Stable and sustainable economic growth and development: The stability and sustainability of economic growth refer to the growth in national income which will be sustained in the future as well (Tomlinson et al., 2014). The primary goal is to increase literacy rate, high standard of living and others.
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ii. Full employment: It refers to the situation in which the labor force is fully employed in productive work.
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iii. Stable prices: It refers to the mean average rise in price with a small amount.
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iv. Balance of payment equilibrium and stability in exchange rate: The stability in the payment is required, which is a difference of domestic transaction regarding the international exchange.
e. Circular flow of income
It is defined as the process in which the national income and expenditures are moving in a circular flow.
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The inner flow includes inflow and outflow between household and firms. The household provides services to the firm, and the firm provides goods. The household provides land, labor and capital and firm provide rent, income, and wages.
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The withdrawals include savings, taxation, and imports.
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The injections include capital spending, government expenditure, and export expenditure.
Q3.
a. Following are the four major areas of finance:
a. Public accounting:
It includes audit, taxation, forensic, IT and system audit. The audit is mainly done to render advice on the internal controls and the practices of accounting. The tax is required to prepare tax returns. Forensic is used to investigate the potential fraud and make recommendations for its preventions. The evaluation of workflows and control in the system.
b. Corporate accounting:
It includes three stems mainly: audit and compliance, financial accounting, and management accounting. The financial accounting is used to make journal entries, reconciliations, preparation of financial statements and its analysis.
c. Corporate finance:
The corporate finance includes treasury, management accounting, and FP&A. The treasury is used to manage banking relations, debt compliance and others. The management accounting is used to take business decisions with budgets, forecasts and cost analysis (Damodaran et al., 2016). FP&A includes project analysis, return on investment and others.
d. Investment banking:
The investment banking includes money management, merger and acquisition, private equity and venture capital. The money management is handled by money manager through hedging of funds and investment banking. The merger and acquisition help to go public. The private equity is used to buy investments. The venture capital is used to find funds for the start-up of business.
b. Following are the determinants of market interest rates:
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Business risk: It refers to the risk associated with the future cash flows of a company.
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Financial risk: Financial risk relates to the risk associated with the uncertainties of a company. It includes the ability of a company to pay its debts.
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Liquidity risk: It refers to the risk associated with the liquidity of security. Higher the liquidity then lowers the interest rates.
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Country-specific risk: It refers to the risk associated with the uncertainties and economic conditions of the foreign economy.
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Expected inflation: The inflation rate reduces the purchasing power of due to which the interest rate tends to rise.
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Liquidity premium: The less liquid security compensate the holder by order at a high rate of interest.
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Real-risk free rate: It considers no risk, but it reflects differences in timing.
c. Following are the four basic financial statements:
a. Income statement:
It is used to calculate the revenue, expenses, and profit/loss of a financial year.
b. Balance sheet:
It represents the assets, liability, and equity of a company in an accounting year.
c. Statement of cash flows:
It represents the cash inflow and outflow of a company in a particular accounting year.
d. Statement of retained earnings:
It is mainly used in auditing financial statements packages.
d. Following is the calculation of ratios:
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Liquidity ratiosThe current ratio is used to analyze the liquidity of a company. The ideal ratio is 2:1. The formula for calculating current ratio is current assets divided by current liability. The current ratio is 0.57 (Mark et al., 2014). The current rate is satisfactory because it is near to 2:1.
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Market value ratios
The earning per share is used to calculate the earnings of a single share. The formula for calculating earnings per share is net income divided by a number of outstanding shares.
The Earnings per share is 0.64 (Mark et al., 2014). -
Debt management ratios
The debt equity is used to analyze the leverage of a company. Te debt ratio is calculated by dividing debt by equity.
The debt-equity ratio is 0.61 (Mark et al., 2014).
The higher ratio indicates that the company is aggressive in financing its growth. -
Asset management ratios
The asset turnover is used to analyze the sales of a company from its assets. The formula for calculating the ratio is sales divided by total assets.
The asset turnover ratio is 1.33 (Mark et al., 2014).
The higher ratio indicates that the performance of a company is better.
Q4.
a. Capital budgeting is defined as the process of taking decisions for long term investment. It plays an important role because it creates accounting and measurability. The capital budgeting is used for taking long-term investment decisions which require the long-term investment of funds and time (Bierman et al., 2012. Following is the process of taking capital budgeting decision:
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1. Develop and create long-term strategic goals
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2. Find out new investment projects
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3. Forecast and calculate future cash flows
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4. Facilitate the transfer of information
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5. Screening and controlling of expenditure
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6. Creation of decision
b. Net present value is defined as the method of capital budgeting. It is the difference between present values of inflow less present value of outflow. It is also known as discounted cash flow method. It is used to take the decision of accepting or rejecting the project. It the net present value is positive then the project is accepted if the value is negative then the project is rejected.
c. The yield curve is defined as the graphical representation of yield of similar-quality bonds against its maturities. It is also known as the term structure of interest rates (Greenwood et al., 2015). There are four types of a yield curve.
1. It refers to the yield on longer-term bonds which will continue to increase.
2. It represents the short-term yields are higher than long-term yields.
3. The flat yield curve is made when there is less difference in short and long term yields.
Conclusion
The paper is segmented into two aspects namely economic and finance. In the economics, we have discussed three production process namely job production, batch production and flow production. The opportunity cost is defined as the cost of missing an opportunity. The main purpose of the UK standard international classification is to provide the framework in which all the business establishments are divided by economic activities. The shift in demand curve is due to change in taste and preferences of consumers and movement along demand curve is due to change in price. The increase in demand force consumers to buy substitute goods and the income effect include at what price the income is affected. Two types of market explained are a monopoly and monopolistic. The public goods are mainly the goods which are not affected by the use of an individual. The inner circular inflow includes household and firms. The four major areas include public accounting, corporate accounting, corporate finance, and investment banking. The determinant of market interest rate includes business risk, liquidity risk, financial risk country-specific risk, expected inflation and liquidity premium. The four financial statements include income statement, balance sheet, statement of cash flows and statement of retained earnings. The ratio analysis is done on the basis of four ratios. The capital budgeting is important because it creates accountability and measurability. The net present value is used to select the project on the basis of accepting the positive NPV project and reject negative NPV project.
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Greenwood, R., Hanson, S.G. and Vayanos, D., 2015. DP11005 Forward Guidance in the Yield Curve: Short Rates versus Bond Supply.
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Jonsson, H. and Rudberg, M., 2015. Production System Classification Matrix: Matching Product Standardization and Production-System Design. Journal of Construction Engineering and Management, 141(6), p.05015004.
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Jones, J., 2013. UK Service Industries: definition, classification, and evolution. Research Note Office for National Statistics. London: ONS.
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Damodaran, A., 2016. Damodaran on Valuation: security analysis for investment and corporate finance (Vol. 324). John Wiley & Sons.
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Bierman Jr, H. and Smidt, S., 2012. The capital budgeting decision: economic analysis of investment projects. Routledge.
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Tomlinson, J., 2014. British Macroeconomic Policy Since 1940 (Routledge Revivals). Routledge.
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Mark and Spencer, (2014). Annual report and finnacial statement 2014. mark and spencer, pp.89-91.
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