Accounting Economics And Business 14 Nov

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ACCOUNTING, ECONOMICS & BUSINESS

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ACCOUNTING, ECONOMICS & BUSINESS

Dr. T.K. Jain.

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State the difference between accounting concepts and

conventions.

• A concept is a theoretical idea, but a convention is an established practice, which is generally folllowed by people.

• Conventions are based on concepts.

• Concepts are comparatively objective norms, conventions are more of subjective norms


X of Mumbai sent goods to Goti of Delhi. The goods are to be sold at 125% of cost which is invoice price on above. Goti was entitled to commission of 10% on sales +

25% on any surplus realised above invoice price. 10% of goods sent on

consignment , invoice value of which is Rs. 12500, were destroyed. 75% of the

total consignment is sold by Goti at Rs. 1 lakhs. The amount of commission will

be ?


Solution

• Total consignment – 125000• Cost of total consignment = 1 lakhs• Sale of cost = 75000• Invoce price of this = 93750• Sale price : 100000• Commission : 10% on sale = 10000• 25% on surplus 6250 = 1562.5• Total commission = 10000+1562.5=11562.5


Continued….

• Concepts are very well prepared and consistent. Conventions evolve based on practices and therefore have internal inconsistency

• Concepts are uniformly applicable on all similar organisations, conventions differ from place to place

• Individual judgment may have some role with conventions, not with concepts.


Discuss the merits of double entry system of accounting.

• Double entry system of accounting give lots of advantages like:

• 1. easy to spot errors• 2. higher level of accuracy and complete

information• 3. comparisons are possible• 4. stops any possibility of calculation mistakes

and minimises possibility of fraud• 5. scientific and better method (in comparion to

single entry bookkeeping).


What do you mean by accounting equation?

• Capital = Assets – Liabilities


Which of them is nominal account?

• (I) Stationery Account• (U) Depreciation Account -• (iU) Cash Account• (iv) Bank Current Account• (v) Goodwill Account - -• (vi) Interest Account• (vU) Patents and Trade Marks Account• (viii) Capital Account• (ix) Bank Loan Account• (x) Freight Account• (xi) Drawings Account -• (xii) Rent Account• (xiii) Account of Goti, a customer


Solution• (I) Stationery Account - nominal• (ii) Depreciation Account - nominal• (iii) Cash Account – real • (iv) Bank Current Account - personal• (v) Goodwill Account - - real• (vi) Interest Account – nominal • (vii) Patents and Trade Marks Account – real • (viii) Capital Account- personal• (ix) Bank Loan Account – personal • (x) Freight Account – nominal • (xi) Drawings Account - personal• (xii) Rent Account – nominal • (xiii) Account of Goti, a customer – personal


Which of these are expenses / assets?

• (i) Purchasing typewriters

• (ii) Acquiring trade marks -

• (Ui) Paying salaries

• (iv) Acquiring a lease of land for 15 years

• (v) PayIng Interest

• (vi) PurchasIng furnIture

• (vu) Paying coVnpsn to Injured worker8


Solution

• (i) -Purchasing typewriters – asset • (ii) Acquiring trade marks - asset• (iii) Paying salaries - expense• (iv) Acquiring a lease of land for 15 years -

asssets• (v) PayIng Interest - expenses• (vi) PurchasIng furnIture - assets• (vii) Paying compensation to Injured workers –

expenses


What is the difference between financial accounting, cost

accounting & management accounting?

• Financial accounting helps you in recording and analysing day to day transactions as per requirements of law and it gives true and fair picture of profits and assets and liabilities.

• Management acct. helps you in decision making (which is based on information provided by financial accounting).

• Cost accounting helps you in ascertaining costs and in controlling costs


Solve it • Goti is a small cloth merchant, who has not kept full double entry records.

His position as on 1St January, 2007 stood as follows• Cash in hand As 1 520, balance at bank Rs 13 900 stock As 25,200, sundry• debtors As 9,000, furniture As 4 000 and sundry creditors As 8 620 His

position on 31st December of 2007 is as follows• Cash In hand As 940, balance at bank as per bank pass book As 11 860,• stock Rs 33,400, sundry debtors As 12,640 furniture Rs 4 000, scooter• Rs 8,000 and sundry creditors As 10,600• During the year he had withdrawn Rs 800 per month for his personal

expenses and purchased a cooter for his business use for As. 8,000. A cheque for As. 2,000 issued on 29.12.2007 was presented for payment on

• 12.1.2008.• Prepare a statement showing his trading results for the year ended 31st

December, 2007 and a balance sheet as on 31st December, 2007 after a) providing 10% depreciation on furniture and 20% depreciation on cooter; (b) writing off As. 640as actual debts; and (c) making a 5% provision for likely haddebts.


Goti and Kap are partners. Goti without authority of Kap buys

shares of Reliance in his own name with the money of the firm. Are the shares so purchased the property

of the partners?

• No. it is personal property of Goti and it will be treated as personal withdrawal by Goti and he will have to give profit to the firm.


Goods delivered on sale or return basis were pledged by the

delivery. Can the original owner recover the goods from the

pledgee?

• Yes – as the title to the goods has not yet transferred, the original owner can recover the goods from pledgee.


When the obligation is not probable on the amount expected to be paid to settle the liability – which cannot be measured with

sufficient reliability, what is it called?

• Because we are not able to measure the liability accurately and the liability is not certain also , it is called contingent liability. It is shown as a footnote to the balance sheet.


Revenue is said to be realized when:

• (a) Cash is received

• (b) Sales are made

• (c) Goods are manufactured

• (d) Cheque is realised


HOW WILL YOU CONSOLIDATE THE ACCOUNTS OF THE 2

COMPANIES?


Solution - Prepare statement of affairs for the two years.

1 jan 2007• Capital 45000• (balancing figure)

• Creditors 8620 •

• Cash 1520• Bank 13900• Stock 25200 • Furniture 4000• Debtors 9000• Total : 53620


Statement of affairs on 31 dec. 2007

• Creditors 10600• Capital =55000• (balancing figure)

• Cash 940 • Bank 11860 – 2000• = 9860 • Stock 33400• Debtors 12640 - 640 –

provision for debt 600• = 11400• Furniture 4000 –

400=3600• Scooter 8000-1600 =

6400• Total : 66208


Statement of profit

• Difference in capital in end and in the beginning: (55000 – 45000) = 10000

• Adjust withdrawals:

• (9600 – 8000) = 1600

• =11600 answer.


Solve the following

• A party agrees to pay 10 lakhs to another party if first party brings to earth a star from sky, this is known as.----

• (a) Contingent contract• (b) Quasi Contract• (c) lmplied contract• (d) Wagering contract• (e) Void contract • Solution : void contract.


What is the full form of CRR?

• Cash reserve ratio


What is SLR?

• Statutory liquidity ratio


Solve the following

• A person who supplies “necessaries” to a minor is entitled to be reimbursed from the personal property of the minor on the basis of :

• (a) Valid contract• (b) Voidable contract• (c) Quasi contract• (d) Contingent contract• Solution • C – quasi contract


Solve it …

• Fine may be made the essence of a contract by self sequent notice also. This Statement is

• (a) True

• (b) Partly true

• (c) False

• (d) Partly false


Example of quasi contract

• It is the duty of the finder of goods to trace the true owner of the goods, and if does not do so, he shall be guilty of

• (a) Theft• (b) Extortion• (c) Criminal misappropriation of property• (d) None of the above• Solution • (a)


Bank overdraft as per trial balance is Rs. I .60 crore. Bank has

allowed the customer 80 % of the hypothecated goods.

Hypothecation of stock has been done by the bank at 80% of the

original closing stock value. What is the amount of closing stock


Solution

• 1.6 *100/80 = 2 crore is the value of hyp.

• Value of hyp. Is takes as 80% of stock

• Therefore stock is 2*100/80 = 2.5 crores

• Thus stock of goods is 2.5 crores. Answer.


What is day to day market period?

• It is a very short period, in this period the suppliers cannot change their supply, therefore supply curve is like a straight vertical line. Prices solely depend on demand. If demand increases, prices will increase and vice versa. Supply is fixed and cannot change in this period.


Why is demand curve convex to the origin?

• The demand cannot touch either side of the axis because even if prices increase very much there would be some buyers at least.

• CONVEX SHAPE


What is equilibrium of the firm in day to day market period in perfect

competition? • During day to day period,

the firm has to decide whether to sell or not. The firm cannot increase production or supply, the only decision the firm has to take is whether to sell or not. If the prices increase due to increased supply, the firm may wish to sell otherwise may not sell.


A company purchased 3 years lease on 1st April, 2004 for Rs. 50,000. It is decided to

provide for the replacement of the lease at the end of 3 years by setting up a depreciation

fund. It is expected that investment will fetch at 12%. The investments are sold for Rs. 28,500.

•


Solution

• Let us find out the amount that will be Rs. 50000 at the end of 3 years so that we may deposit that amount every year.

• A((1+rate)^n -1)/rate = 50000

• ((1.12)^3-1)/(.12*50000) = 1/annuity

• Annuity = 14817.45


Solution

• Each year we will transfer Rs. 14817.45 in depreciation fund account and at the end of 3 years the investments will be sold in the market.


A machine purchased on 1.4.2003 for Rs. 10 lakhs was depreciated on straight line basis

over its useful life of 10 years. On 1-4-5, it was found that machine is in a good condition and will be used in the production for another 10

years. The amount of depreciation for theyear 31-3-06 will be?

• In the two financial 2003-4 and 2004-5 we have already provided depreciation of Rs 200000 (1 lakh each year). Now remaining value is Rs. 8 Lakhs to be depreciated in next 10 years. So we will charge dep. Of rs. 80000 only. Answer.


Goti of Kolkala sends goods costing 100000 to Pawan of Mumbai at cost + 25%. Consignor’s expenses Rs 2,000. 3/5’ of the goods were sold

by consignee at 85000. Commission 2% onsales + 20% of gross sales less all commission

exceeds in-voice value. amount of totalcommission will be:

• Goods of cost Rs. 60000 were sold for 85000. general commission = 1700

• Their invoice price = 60000*1.25=75000• Additional commission = 20/120*(10000-1700)

= 1383 Total commission = 3083 ans.


FINANCIAL ANALYSIS – PREPARE THE BALANCE SHEET

• You are given the following figures:• Current ratio 2.5 Liquid ratio 1.5• Net working capital Rs. 3,00,000• Fixed assets turnover ratio• (on cost of sales) 2 tImes• Average debt collection period 2 months• Stock turnover ratio• (cost of sales/closing stock) 6 times• Gross profit ratio 20%• Fixed assets/shareholders net worth 0.80• Reserve and surplus/capita! 0.50


SOLUTION

• LIABILITIES• Equity + reserve =

900000• (reserve is 300000 and

equity 600000) • Current liabilities 200000

• ASSETS • Current assets • Debtors 250000• Cash / bank 50000• Total Liquid assets 3

lakhs• Inventory = 2 lakhs• Total 500000• Fixed assets 600000• TOTAL = 11 LAKHS


Other information

• Cost of Sales = 6* inventory = 12 lakhs

• GP on cost of Sales 12 *25/100 = 3 lakh.

• (20% on sales, therefore we take 25% on cost of sales)

• Thus sales = 12+3 = 15 lakhs

• Cost of sales / Fixed assets = 2

• So fixed assets are 6 lakhs


Continued

• Avg. Debtors / Sales * 12 = 2

• Avg. Debtors = 2 * 1500000/12

• =2,50,000

• Fixed assets / net worth = .8

• 600000/Net worth = .8

• Net worth = 750000


State, explain and critically discuss the Cambridge version of Quantity

Theory of Money.

• Prices depend on quantity of money. If quantity of money increases, prices will increase and vice versa. There are two popular theories : Fisher and Cambridge

• Fisher = MV = PT

• M= money V = velocity of money

• P = prices T = volutme of items sold.


Solution ….

• Cambridge:

• P = KR / M

• P = prices

• K = Proportion of money that people want to keep with them

• R = Real resources

• M = quantity of money.


What are the factors which determine cash deposit ratio of a bank? What are the sources of cash reserves of the banking

system?

• It denotes the cash that banks have to keep with themselves. Suppose deposit is Rs. 100 and CD ratio is 20%, the banks have to keep Rs. 20 with them. Higher the CD ratio, less will be credit creation. CD ratio depends on inflation, liquidity, demand of money and monetary policy etc


How would you define money? What are alternative approaches

for doing so?

• Money is defined in terms of the functions that it performs. There are 4 functions that it performs. These are :

1. Medium of exchange

2. Store of value

3. Measure of value

4. Standard for deferred payments.


Continued…

• There are two basic approaches to defining money: 1. functional approach 2. liquidity approach

• Functional approach – define money in terms of functions that it performs (the main being medium of exchange).

• Liquidity approach - money is considered 100% liquid resources. Other assets are comparatively less liquid.


WHAT IS GRESHAM’S LAW?

• Bad currency will throw out good currency from circulation.


What are the functions of money?

• Store of value

• Exchange value

• Security

• Measurement


Draw production possibility curve with the following information . .

• There are 2 goods – one from 0 to 5 and another from 30 to 0. if we increase production of first from 2 units to 4 units, what is the opportunity cost?

• It is 14 units of 2nd item.

0 1 2 3 4 5

30 28 24 18 10 0


There are two types of products, what is the opportunity cost of producing 10 units of first unit instead of 0 units?

• Answer 5 units of second unit.

• If we have 30 units of first and 45 units of second unit, would you go for it?

• Solution: No as we can get 30 + 75 so why should we go for 30+45. answer.

0 105

10 100

20 90

30 75

40 55

50 30

60 0


Solve the following?

• Sudha quit her job at a private company where she earned Rs. 2,90,000 a year. She withdrew Rs. 4,00,000 in a savings account that earned 10% interest annually to buy a second hand mini bus to commune passenger between Cannaught Place and Noida. There arc 1000 passengers who will pay Rs. 4000 a year each for commuter services; Rs. 2800 from each passenger goes for petrol, maintenance, depreciation etc.


Find opportunity cost of Sudha?

• The opportunity cost of Sudha is : Rs. 2,90,000 which she was getting in a company.


What is the accounting cost of Sudha?

• The cost is : • Interest : Rs. 40000• Plus petrol / diesel / other expenses • @ 2800 per pessenger (this is variable

expneses = as it depends on route etc.)• 2800*1000 = 28,00,000 answer. • Income = 4000*1000• =4000000 answer.


What is the economic cost of Sudha?

• Economic cost = opportunity cost + accounting cost

• = 290000 +2800000 answer.


What should a developing economy do ?

• It should initially promote heavy industries – because they can help in providing infrastructure, basic facilities, services etc. thus they will create a base for rapid industrialisation

• It should initially build infrastructure so that FDI flows in and industries are set up thus employment generation takes place.


In the previous PPC (production possibility curve) if production of

second unit is increased from 10 to 24, what is the opportunity cost?

• Two units of first units.


We make DahiBada and cost structure is as under?

Qty TC FC VC AVC AFC MC TC

0 100

10 210

20 300

30 400

40 540

50 790

60 1060


If price of DahiBada is Rs. 14 each, what is the best output?

Qty TC FC VC AVC AFC MC TC TR Profit

0 100 0 -100

10 210 140 -70

20 300 280 -20

30 400 420 20

40 540 560 20

50 790 700 -90

60 1060 840 -220


Solution

• The best output is at 30 unit and 40 unit level. We may explore further and the best out put may be at 35.


What is VC when 60 DahiBada are made?

• VC = TC – FC

• =1060 – 100

• =960


A contracts with B to buy jewellery made of pearls whereas in fact it IS

made of imitation pearls of no value. B knows that A is mistaken and takes no steps to correct the error. NOW A wants to cancel the

contract on the basis of fraud. what should he do?


Solution

• There is no proof that B had committed fraud. He didn’t give any false information. Let the buyer beware – and therefore it was the duty of A to inquire about the product.


what is AFC?

• Average fixed Cost

• = Total fixed cost / total number of units manufactured

• Suppose total fixed cost is Rs. 500, and we have made 200 units, the AFC is 2.5

• If suppose we make 500 units AFC will come down to only Re. 1.


If this is the cost schedule, what is the AFC & AVC when we make 6 units?


Solution

• Fixed cost = 240

• 240/6 = 40 per unit. (AFC)

• AVC = TotalVariable cost / Total no. of units

• Variable cost = TC – FC

• =690 – 240 = 450

• AVC = 450 / 6 = 75 per unit answer.


What will happen if utility obtained in first unit is 10, 2nd unit 7, 3rd unit

3, and 4th unit = -4. show total utility


In the previous question, how many units will the consumer

consume and what will be his total utility?

• The consumer will consumer 3 units and his total utility will be 20. (the consumer will not use fourth unit). Marginal utility will be 3 at that time.


When do you find marginal return diminishing?

units TC

0 240

1 330

2 410

3 480

4 540

5 610

6 690


Solution

units TC MC

0 240

1 330 90

2 410 80

3 480 70

4 540 60

5 610 70

6 690 80


Solution …

• As in the previous graph we can see that the marginal cost (MC) is reducing initially - but it starts increasing when we make 5th unit. Marginal returns decrease when MC starts increasing. Thus marginal returns start decreasing from 5th unit. Answer.


What do you understand by equilibrium of a firm? Explain your

answer.

• The firm is said to be in equilibrium when MR = MC. There are different market conditions like perfect market, monopoly or monopolistic competition, in each of these conditions the equilibrium is when MR = MC and MC curve cuts from below.


Example:EQUILIBRIUM OF THE FIRM


Clarify the statement that a firm is a price taker under perfect

competition but not so in monopoly or monopolistic competition. Give

reasons for youranswer.

• In perfect market, the prices are determined purely by industry and not by individual firm. The firm has no role in price decision. There are very large number of firms and no firm can alone influence price.


Illustration . .as we can see in the graph below : (there are different firms, each trying to match

industry..


Detailed explanation

• Perfect market is the market condition where the aggregate demand and aggregate supply decide the price. Purely the market forces work (all the goods are homogenous) and they determine price, which has to be followed by the firms.


Graph of perfect market.


Explain the concept of optimum output. Under what conditions is it

achieved by a firm ?

• Optimum output can be achieved in the long run. In short run the firm can only vary only one factor = labour. It cannot change the other factor of production. Thus in short run only one factor is variable.

• MC curve of the firm is also taken as supply curve for the firm.


Solution

• Optimum output is achieved when the firm is having MC = MR and has minimum cost of production. It is the condition when the firm is able to use its resources to the best. Conditions:

• MR = MC• The factors of production can be adjusted

to have the best utilisation of factors of production.


Graph


What will happen if prices increase and income of the people also

increase. Presently you are at 1.


Solution

• If price increase, demand should fall, however, income also increase therefore demand curve will again increase thus demand curve will remain constant. Supply curve will remain as it is (as there is no information about cost or supply). We will remain at 1.

• Answer.


Explain the determination of long term equilibrium of a firm under perfect competition. Show, inter

alia, that it will produce at the least possible average

cost of production.• In the long run, no firm is able to earn

super normal profit. The MR= AR and at this point MR = MC (equilibrium) and in long run MC = AC (at the point of equilibrium) – no firm earning profit / loss.


Graph…


A shopkeeper sells gel pen at Rs. 10 per pen. At this price he can sell 120 per month.

After some time, he raises the price to Rs. 15 per pen. Following the price rise:

• Only 60 pens were sold every month.• The number of refills bought went down from

200 to 150.• The number of ink pen customers bought

went up from 90 to 180 per month.

The Cross elasticity of monthly demand for refills when the price of gel pen increase from

Rs. 10 to Rs.15 is equal to:


Solution

• Change in demand / change in price

• Change in demand =

• = 50/200 *100 = 25%

• Change in price = 5/10*100 = 50%

• Thus solution = 25/50 = - .5 answer.

• (it is always negative)


The cross elasticity of monthly demand for ink pen when the price of gel pen increases from Rs.10 to

Rs. 15 is equal to:

• Change in demand / change in price

• Change in demand =

• = 90/90 *100 = 100%

• Change in price = 5/10*100 = 50%

• Thus solution = 100/50 = 2 answer.

• (it is always positive)


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Accounting Economics And Business 14 Nov

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Transcript of Accounting Economics And Business 14 Nov