BASICS ON FINANCE AND ECONOMICS

A webinar by

FINATIX , The Finance Club of

Discussion Topics

FINANCE

Accounting Principles and Accounting Concepts

Accounting Policies

Financial Statements

Financial Ratios

ECONOMICS Microeconomics Basics of Supply

and Demand Curve

Macroeconomics Aggregate

demand and supply

Fiscal policy and monetary policy

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Accounting Concepts

There are few basic rules for recording any accounting transactions

a) Dual Aspect Concept - It must have two sides

b) Money Measurement Concept - It has to be in terms of money

c) Periodicity Concept - It falls between a specified period

d) Entity Concept – It is specific to a particular entity

e) Conservatism Concept - Future losses to be recorded but not future gains

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Accounting Concepts

f) Matching Concept - Expenses related to Incomes only can be recorded

g) Historical Cost Concept - Assets to be recorded at purchase price

h) Realisation Concept - Profits to be recorded only when sale has taken place

i) Materiality Concept - It needs to be material for decision making

j) Capitalisaiton Concept - Costs related to capital assets before put to use

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Financial Statements – Profit and Loss Account

It reports a company's revenues, expenses, and most of

the gains and losses which occurred during the period of

time specified

Generally prepared for one year period

The bottom line of this financial statement appears

as net income, which is the net amount of the revenues,

expenses, gains, and losses being reported

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Financial Statements – Balance Sheet

It represents a company's financial position at the end of a specified date

Assets:

Assets are the things that a business owns or sums that are owed to the business at any one moment in time

The business obtains the finance for these assets from two main source:

Internally (inside the business) from capital raised from the business owners

Externally - for example, in the form of loans, and other forms of finance which needs to be repaid

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Financial Statements – Balance Sheet

Liabilities:

When you set up a business, the business becomes a legal body in its own right

Internal finance (shareholders' funds) is owed to shareholders

External finance is owed to people outside the business - liabilities

The Balance Sheet will therefore balance since in simple terms this shows that the value of a businesses assets is financed by the two groups –

Internal (owner's capital),

External (liabilities).

A balance sheet typically appears in a vertical format

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Financial Statements – Cash Flow Statement

A financial statement that shows how changes in balance

sheet accounts and income affect cash and cash equivalents,

and breaks the analysis down to operating, investing and

financing activities

Management decisions for the next years can be based on the

cash inflows or cash outflows from each individual activities

Also it portrays the usage or generation of cash from which of

the following operating, investing or financing activities

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Financial StatementsRatios

Liquidity Ratio

Profitability Ratio

Activity Ratio

Solvency Ratio

Leveraging Ratio

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Financial Management

The theory of Financial Management is the theory of financial decision making by business firms

It can be described as the study of decisions that every firm has to make related to financial matters

It is the managerial activity which is concerned with the planning and controlling of the firm’s financial resources

It can be viewed as proper management of flows of funds in a firm

“Financial Management is concerned with the managerial decisions that result in the acquisition and financing of short term and long-term credits for the firm”

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Financial Management – Procurement of Funds

Sources of

Funds

Equity

Debt

Hire Purchas

e

Angel Financin

g

Venture Capital

Commercial

Banks

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Financial Management – Types of Capital

Equity Share Capital

Reserves and Surplus

Preference Share Capital

Long Term Loan Funds

Term Loans

Debentures

Short Term Loan Funds

Bank Overdraft

Credit Limit

Types of Capital

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Economics and its Scope

• Economics

It is the social science that studies how individuals, groups, and organizations (called economic actors, players, or agents), manage scarce resources, which have alternative uses, to achieve desirable ends.

• Microeconomics: examines the functioning of individual industries and the behavior of individual decision- making units—that is, business firms and households.

• Macroeconomics: that examines the economic behavior of aggregates— income, output, employment, and so on—on a national scale

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Prices and Markets

• Microeconomics describes how prices are determined.

• In a centrally planned economy, prices are set by the government.

• In a market economy, prices are determined by the interactions of consumers, workers, and firms. These interactions occur in markets—collections of buyers and sellers that together determine the price of a good

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Market

• Collection of buyers and sellers that, through their actual or potential interactions, determine the price of a product or set of products.

• Market Definition: Determination of the buyers, sellers, and range of products that should be included in a particular market.

• Extent of a market Boundaries of a market, both geographical and in terms of range of products produced and sold within it.

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Types of Markets • Monopoly and monopolistic competition

• Monopsony

• Bilateral Monopoly

• Duopoly

• Oligopoly

• Cartel

• Oligopsony

• Perfectly competitive market

• Noncompetitive market

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Classification of

goods • Complementary goods: Complementary goods are one

that are consumed together, e.g., hamburgers and French fries or IPods and IPod docking stations.

• Substitute goods are alternatives to one another, e.g., a bicycle is a substitute for a car in transportation.

• A normal good is one the consumption of which increases as

income increases.

• An inferior good is one the consumption of which

decreases as income increases. Example cheap wine.

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Basics of

Demand and Supply

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The Demand

Curve • Relationship between the quantity of a good that

consumers are willing to buy and the price of the good.

• We can write this relationship between quantity demanded and price as an equation:

• QD = QD(P)

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The Demand Curve

• The demand curve is downward sloping, holding other things equal, consumers will want to purchase more of a good as its price goes down.

• The quantity demanded may also depend on other variables, such as income, the weather, and the prices of other goods.

• A higher income level shifts the demand curve to the right ȋfrom D to DǯȌ.

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The Supply Curve

• Relationship between the quantity of a good that producers are willing to sell and the price of the good.

• We can write this relationship as an equation:

• QS = QS(P)

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The Supply Curve

• The supply curve is upward sloping: The higher the price, the more firms are able and willing to produce and sell.

• If production costs fall, firms can produce the same quantity at a lower price or a larger quantity at the same price. The supply curve then shifts to the right (from S to S’).

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The Market Mechanism

• The market clears at price P0 and quantity Q0.

• At the higher price P1, a

surplus develops, so price falls.

• At the lower price P2,

there is a shortage, so price is bid up.

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Elasticities of Demand and

Supply • Price elasticity of Demand :

Price elasticity of demand measures the responsiveness of

demand to changes in price for a particular good.

• Price Elasticity of Demand = % Change in Quantity

Demanded/ % Change in Price

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Elasticities of Demand and

Supply Other Demand Elasticities

●income elasticity of demand -Percentage change in the quantity demanded resulting from a 1-percent increase in income.

●cross-price elasticity of demand: Percentage change in the quantity demanded of one good resulting from a 1-percent increase in the price of another.

Elasticities of Supply

●price elasticity of supply Percentage change in quantity supplied resulting from a 1-percent increase in price

.

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Some other concepts

• Opportunity cost is the best alternative that we forgo, or give up, when we make a choice or a decision.

• Opportunity costs arise because time and resources are scarce. Nearly all decisions involve trade-offs.

• Sunk costs are costs that cannot be avoided, regardless of what is done in the future, because they have already been incurred.

• Marginalism : In weighing the costs and benefits of a decision, it is important to weigh only the costs and benefits that arise from the decision.

• For example, when deciding whether to produce additional output, a firm considers only the additional (or marginal cost), not the sunk cost.

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Macroeconomics

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Aggregate Demand and

Supply • Aggregate Demand: • It is made up of four basic components: AD = C + I + G + NX C - Consumption demand I-Investment Demand G - Government Expenditure NX - Net Exports • Aggregate Supply: In economics, aggregate supply is the

total supply of goods and services that firms in a national economy plan on selling during a specific time period. It is the total amount of goods and services that firms are willing to sell at a given price level in an economy

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• The Government can intervene in the market through two types of policies:

• FISCAL POLICY

• MONETARY POLICY

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Fiscal Policy

• Fiscal Policy is the use of government revenue(taxes) and expenditure to influence the economy.

• An increase or decrease in government expenditure has a direct impact on the AD as it leads to increased or decreased demand for goods and services in the economy.

• An increase or decrease in the taxes leads to a change in the disposable income of the people leading to a corresponding change in the expenditure of the people

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Monetary Policy • Monetary policy is the process by which the monetary

authority of a country controls the supply of money, often targeting a rate of interest for the purpose of

promoting economic growth and stability.

• The central bank influences interest rates by

expanding or contracting the monetary base, which consists of currency in circulation and banks' reserves on deposit at he central bank.

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• Open Market Operations: An open market operation (also known as OMO) is an activity by a central bank to buy or sell government bonds on the open market. A central bank

uses them as the primary means of implementing monetary policy.

• Reserve Requirements: The banks need to hold a fraction of

all deposits that they receive with the central bank and with themselves. This is called the required reserve ratio of banks.

• The required reserve ratio is sometimes used as a tool in monetary policy, influencing the country's borrowing

and interest rates by changing the amount of funds available for banks to make loans with.

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• There are two basic components of required reserve ratio that

might be changed to alter the amount of loanable funds available

with the banks. These are:

• Statutory Liquidity Ratio(SLR): SLR specifies the fraction of

deposits that the banks need to hold with themselves in order to maintain a certain minimum level of liquidity. This is determined by the central bank of the country.

• Cash Reserve Ratio(CRR): CRR is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank. CRR is set according to the guidelines of the central bank of a country.

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Repo and Reverse Repo

• Repo Rate: The repo or repurchase rate is the interest charged by the RBI to banks when they approach it for short term loans.

• Reverse Repo: Reverse Repo rate is the rate at which the RBI borrows money from commercial banks. Banks are always happy to lend money to the RBI since their money are in safe hands with a good interest.

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THANK YOU

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