Business Finance and Economics

BUSINESS FINANCE AND ECONOMICS

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Introduction

Acquiring knowledge of accounting principles, financial reporting, and company decision-making processes are among the objectives of this assignment. Within the context of organisational decision-making, it looks at financial statement analysis, microeconomics, accounting principles, management accounting, and financial ratios. A comprehensive framework for evaluating a company's performance and making wise decisions may be derived from proactive consideration of these factors.

Task1: Business performance and economic factors

Microeconomics

In what ways individuals and organisations allocate scarce resources is a central question in microeconomics. The key point is the decision-making process and the way buyers and sellers engage with one another. The impact of these decisions on supply, demand, and price is studied in microeconomics. According to Besanko and Braeutigam, (2020), Microeconomic fundamentals include theories of consumer choice, manufacturing costs, elasticity, and the idea of consumer choice.

Macroeconomics

Macroeconomics, on the other hand, mainly focuses on the structure, behaviour, decision-making processes, and operation of global economies. Included are economies on a global, regional, and even micro level. Big data economics looks at things like gross domestic product, unemployment rates, national income, price indices, and links across industries. Studies on monetary and fiscal policy, international trade, price inflation, and economic development tend to be well-liked.

Business Performance Influence by Microeconomics

A company's decision-making and performance are affected by microeconomics. Profit maximisation in pricing, production, and resource allocation are all areas where businesses turn to microeconomics for guidance. Profit maximisation without user attrition is possible for businesses with deep knowledge of the pricing flexibility of demand. When deciding how to make a product, businesses consider factors including manufacturing costs and economies of scale.
The behaviour of a company's employees is another critical microeconomic component influencing its success or failure. Companies may meet customer demand by tailoring their products and advertising to match customer tastes and spending patterns. How oligopoly, monopoly, perfect, and monopolistic markets impact business operations and competitiveness.

Business Performance Influence by Macroeconomics

The economic and financial contexts in which companies operate are quite different. A high GDP indicates that consumers are willing to spend money on goods and services, which in turn impacts company performance. In a typical economic expansion, companies see an increase in sales and profits. People become more worried about money and the economy suffers when they cut down on spending during recessions.

According to Odintsov, et.al., (2023), Businesses are also affected by inflation, which is a significant aspect of the economy. High inflation reduces purchasing power and increases production costs, which in turn reduces profitability. The cost of borrowing money for companies is determined by interest rates and monetary policy. The cost of financing expansion decreases when interest rates fall. Investment is impeded by higher interest rates since borrowing becomes more costly.

Businesses' performance is impacted by unemployment as well. Reduced consumer spending due to high unemployment rates is bad news for businesses. A scenario where low unemployment makes it difficult to obtain work might lead to wage increases and increased spending by firms.

Theories and Concepts

To determine their impact on a company's capacity to turn a profit, economists may use either microeconomic or macroeconomic models.

Microeconomic Theories and Concepts:

• Production Cost: This study contributes to the improvement of pricing and cost management by examining both fixed and variable production costs.

• Price Elasticity of Demand: By monitoring the impact of prices on consumer demand for their goods, businesses may utilise this data to determine the optimal pricing strategy.

• Market Structures: Analyses the effects of perfect competition and control on a company's strategy and performance.

• Theory of Production: analyses inputs and outputs to assist firms in determining the most optimal production methods.

Macroeconomic Theories and Concepts:

• Fiscal Policy: The economy's health is influenced by taxation and public expenditure. Fiscal policy has the potential to address firms' issues by altering general demand.

• Keynesian Economics: According to Del Regil, (2021) the impact of group demand on GDP growth and employment is discussed in this article. What this implies is that the government may be able to mitigate the ebb and flow of the economy.

• Business Cycles: The explanations for economic growth and contraction are provided. By monitoring business cycles, companies may potentially better anticipate changes in the economy.

• Monetary Policy: According to Bernanke, (2020) to maintain a constant money supply, central banks manage inflation and interest rates. It alters consumer preferences and the investments made by businesses.

Task 2: Accounting Conventions and Role in Preparing Financial Statements

Key Accounting Conventions Explanation

The consistency and accuracy of financial accounts may be more easily ensured with the use of accounting standards. Accounting rules have:

• Consistency: According to Schwert, (2020) Businesses are obligated to implement identical accounting methodologies to evaluate financial data from various periods. Businesses ensure that clients can judge their financial success over time by following this standard.

• Prudence: Accountants should write down expenses and debts as soon as they can be reasonably predicted, but they should wait to write down income until it is certain. That's in line with the careful attitude. Having a complete and correct picture of a business's finances is important for making sure that risks are quickly and correctly assessed whenever they happen.

• Going Concern: A business is thought to be able to keep running for a while for many people. It changes how much assets and debt are worth if it is thought that the business won't go bankrupt soon. This idea explains how to report on finances and make plans for the future.

• Accrual Basis: Instead of recording events when money changes hands, the accrual method of accounting records them as they happen. No matter when the cash flow happens, income and costs are recorded in the order that they are made and spent. This gives a better picture of how well a company has done financially over time.

Importance of preparing Accounting Conventions

According to Carnegie, Parker and Tsahuridu, (2021), Several significant factors highlight the significance of accounting standards. Creditors, investors, and regulators all place a premium on consistent and trustworthy financial record-keeping. Financial reports will accurately portray a company's financial health and performance if certain guidelines are followed. Trust and decision-making depend on partners being reliable. Maintaining accuracy and transparency in financial reporting is a two-way street that begins with adhering to generally accepted accounting rules.

Overview of the Three Major Financial Statements

• Statement of Financial Position: At a given point in time, the balance sheet shows how the company's finances are doing. According to Pantazia, (2021), All of the assets, liabilities, and shares of stock of the company are detailed in this report.

• Income Statement: A company's official record of its current financial status is the Income Statement. The company tracks its sales, expenses, and profit or loss to determine its performance.

• Cash Flow Statement: Money coming into a company Firm's financial flows are recorded in the statement. Based on its expenditure and financing activities, the corporation is flush with cash and able to swiftly adjust its financial strategy.

Accounting Conventions Impact on Financial Statement Preparation

The process of keeping financial records is significantly affected by accounting standards:

• Cash Flow Statement: The Accrual Basis regulation impacts the comparison of net income to net cash from operating operations, despite its primary focus on cash flows. The Consistency Convention guarantees a constant financial flow.

• Financial Position Statement: The Going Concern standard affects the recognition of asset and liability values if everything goes according to plan. Maintaining consistency allows for reliable comparisons by ensuring that asset loss calculation procedures remain unchanged.

• Income Statement: That is, rather than using cash transactions, the Accrual Basis standard is used to match revenue and expenditure to timeframes. To provide a thorough assessment of profitability, the Prudence Convention promptly records all potential expenses and losses.

Task 3: Financial Ratio Calculations and Interpretation

Ratios	Formulas	2019	2020
Operating Profit Margin	Profit before Interest and Tax/Sales Revenue * 100	9.600	1.273
	Profit before Interest and Tax	240.00	35.00
	Sales Revenue	2500.00	2750.00
Inventory Days	Inventory/ Cost of Sales * 365	69.054	54.418
	Inventory	350.00	410.00
	Cost of Sales	1850.00	2750.00
Payable Period	Average Trade Payables / Cost of Sales * 365	36.993	28.047
	Average Trade Payables	187.50	182.50
	Cost of sales	1850.00	2375.00
Receivable Period	Average Trade Receivables / Sales Revenue * 365	35.770	34.509
	Average Trade Receivables	245.00	260.00
	Sales Revenue	2500.00	2750.00
Acid Test Ratio	(Total Current Assets - Inventory) / Total Current Liabilities	2.947	0.949
	(Total Current Assets - Inventory)	560.00	280.00
	Total Current Liabilities	190.00	295.00
EPS (Earning Per Share)	Profit for the year/number of ordinary shares	0.209	0.015
	Profit for the year	167.00	12.00
	number of ordinary shares	800.00	800.00

Additional Calculation		2019		2020
Average Trade receivable	(250+240)/2	245.00	(240+280)/2	260.00
Average Trade payable	(210+165)/2	187.50	(165+200)/2	182.50

• Operating Profit Margin: In 2020, XYZ Plc's profit before interest and taxes, as expressed as a percentage of sales revenue, fell from 9.600% in 2019 to 1.273%. The firm is not functioning as efficiently as it might be as expenses are increasing at a quicker rate than revenues. The company's ability to convert revenues into profits is negatively impacted by a reduced margin, making it less effective at that task.

• Inventory Days: The number of days of inventory decreased from 69.054 in 2019 to 54.418 in 2020, a twenty-one year later. By reducing the number of products it has in stock, XYZ Plc is improving its inventory management and selling things quickly. Improved cash flow, simpler sales, and reduced storage expenses are all possible outcomes of excellent inventory management.

• Payable Period: In 2020, a rise of 365 in the cost of sales caused a decrease in the average trade payables days from 36.993 in 2019 to 28.047. When XYZ Plc's payment period is shorter, employees benefit. With less time to retain funds, the company's liquidity may be compromised. The establishment of relationships with suppliers, however, could benefit from this.

• Receivable Period: According to Luo, et.al., (2021) the average number of days it took to recover trade receivables in 2020 was 34.509, up from 35.770 the year before. With this little adjustment, XYZ Plc may now simply and swiftly recover debts. A quicker debt collection process could lead to higher profits for a business. By doing this, it can get more cash and have fewer bad loans.

• Acid Test Ratio: XYZ Plc appears to have deteriorated its liquidity status, judging by the fact that the acid test ratio has dropped from 2.947 to 0.949. This figure derived by deducting inventory from total current assets and then dividing it by current liabilities shows how well the firm is placed to meet short-term liabilities without engaging in the sale of inventories. A ratio lower than 1, as he indicated in the current period, has a cash flow problem and a high likelihood of financial unrest.

• Earnings Per Share (EPS): Dividing the annual profit by the total number of common shares is the formula for earnings per share or EPS. Earnings per share fell from 0.209 in 2019 to 0.015 the following year. The owners are losing money due to the precipitous decline in value. When a company's earnings per share (EPS) drops, it may damage the confidence of its owners and the value of its stock, making it less attractive to potential investors.

Ratios Analysis and Importance

The activities and financial health of XYZ Plc may be better understood with the use of these figures. Declining operational profit margins and earnings per share (EPS) confirm concerns about inefficient cost management and diminishing operational effectiveness. A shorter payable period and a smaller quantity of available inventory days suggest that paying suppliers more quickly can put pressure on cash flow. A little improvement in the payable time indicates that the collection mechanism is functioning more effectively. In contrast, concerns about the organization's ability to meet its short-term commitments would arise if the acid test ratio suddenly dropped, indicating the presence of liquidity limitations.

These figures reveal that XYZ Plc is now less lucrative and has less cash on hand, even though the company has improved its management of products and debts. To maintain stability and enhance business operations, the corporation should use these outcomes as a basis to implement smart measures to increase cost management, work efficiency, and cash flow.

Task 4: Management Accounting and Organizational Decision-Making

Management Accounting Definition

It is the job of management accountants to keep accurate and up-to-date records of money and statistics so that managers can use them to make daily and short-term decisions. These ideas and methods may help make the planning, controlling, and decision-making processes of a business better.

Management Accounting for Planning Importance

Management accounting includes planning. Before setting objectives, it should devise a strategy for achieving them. It may use the data provided by management accounting to inform the planning processes. According to Burritt, Schaltegger and Christ, (2023), The application of management accounting techniques such as budgeting, planning, and variance analysis may greatly assist firms in achieving their objectives, allocating resources effectively, and making informed financial predictions. Management can produce more accurate projections of future revenues and expenditures with the use of planning. The organisation can accomplish its objectives without exceeding its financial plan because of this. People may benefit from being able to prepare ahead if they could use predictive technology to anticipate market and economic developments.

Role in Control

Keeping an organization's procedures in line with its plans is the responsibility of the control function, which is an element of management accounting. Common management tools include financial control, performance monitoring, and standard costs. One of the main goals of standard costing is to establish reasonable pricing for goods and services and then compare actual costs to those prices. Instantly addressing any discrepancies in performance measurements is possible using variance analysis for managers. To reduce the budget it is necessary to inspect the difference between the actual and estimated costs to identify the disparities. While searching for such things and spending time that should be devoted to things that require repair by management, such strategies help the company stay on schedule in terms of financial and practical objectives.

Role in Decision-Making

This helps the managers make better company decisions with the help of financial and non-financial information. One of the helpful tools is the cost-volume profit analysis. Another useful method is what is known as marginal costing. By using CVP research, managers can learn more about cost, volume, and profit to make decisions about price, product, or growth. A notable technique of using marginal pricing is to determine how more production affects costs and profits. With such focus, the managers can be assured that only costs that relate to decisions are used in the decision-making process. To decide where the problem should best be solved, the following tool can help Relevant cost analysis. These tools are useful for such aspects as dthe istribution of resources, decisions on investmentand s, control of overheads so that organsisation can operate more profitably.

Theories and Concepts

According to Mishra, (2020), There are many concepts and principles on which modern management accounting can be based on. To overcome the obstacles that hinder group performance, the Theories of Constraints (TOC) were developed. The topic of much discussion is throughput accounting, a method for calculating revenue from sales. Along these lines, there is the Balanced Scorecard, which was developed by Kaplan and Norton. In addition to financial data, management accounting often includes perspectives on clients, internal company procedures, and training and advancement. One approach to pricing goods and services is activity-based costing, more often known as ABC. Better decisions about price and product mix may be made with this information.

Management accounting is enhanced by the theories and concepts presented here because they provide reliable lenses through which to examine the performance, plans, and decision-making processes of organisations. With the use of management accounting, business leaders can see the monetary effects of their choices. This contributes to the expansion and increased profitability of sustainable firms.

Conclusion

The assignment included information from many areas of economics, including microeconomics, macroeconomics, statistics, financial records, and accounting regulations. Decisions made by companies and individuals are influenced by both macroeconomic and microeconomic matrices. The reliability and consistency of reported financial data are ensured by accounting standards. The ratios provide key performance indicators (KPIs), whereas the financial records reveal the state of a company's health. Planning, monitoring, and decision-making are all aided by management accounting. The success of the business and the choices taken in terms of strategy are both impacted by managerial economics and accounting.

References

Bernanke, B.S., 2020. The new tools of monetary policy. American Economic Review, 110(4), pp.943-983. https://paulgp.github.io/speeches/bernanke_2020_aea.pdf

Besanko, D. and Braeutigam, R., 2020. Microeconomics. John Wiley & Sons. https://thuvienso.hoasen.edu.vn/bitstream/handle/123456789/12771/Contents.pdf?sequence=1

Burritt, R.L., Schaltegger, S. and Christ, K.L., 2023. Environmental management accounting–developments over the last 20 years from a framework perspective. Australian Accounting Review, 33(4), pp.336-351. https://onlinelibrary.wiley.com/doi/pdf/10.1111/auar.12407

Carnegie, G., Parker, L. and Tsahuridu, E., 2021. It's 2020: what is accounting today? Australian Accounting Review, 31(1), pp.65-73. https://eprints.gla.ac.uk/224075/2/224075.pdf

Del Regil, A., 2021. Keynesian economics and the welfare state. Revista Internacional de Salarios Dignos, 3(01), pp.86-115. https://revistasinvestigacion.lasalle.mx/index.php/OISAD/article/download/3007/2950

Luo, B., Li, X., Wang, S., Huang, J. and Tassiulas, L., 2021, May. Cost-effective federated learning design. In IEEE INFOCOM 2021-IEEE Conference on Computer Communications (pp. 1-10). IEEE. https://arxiv.org/pdf/2012.08336

Mishra, A.K., 2020. Implication of theory of constraints in project management. International Journal of Advanced Trends in Engineering and Technology, 5(1), pp.1-13. https://www.researchgate.net/profile/Anjay-Mishra/publication/338570730_Implication_of_Theory_of_Constraints_in_Project_Management/links/5e1d4e154585159aa4ce8b7c/Implication-of-Theory-of-Constraints-in-Project-Management.pdf

Odintsov, S.D., Oikonomou, V.K., Giannakoudi, I., Fronimos, F.P. and Lymperiadou, E.C., 2023. Recent advances in inflation. Symmetry, 15(9), p.1701. https://www.mdpi.com/2073-8994/15/9/1701/pdf

Pantazia, M., 2021. Towards a Criticism of Profit and Loss Account. Accounting and Management Information Systems AMIS 2021, p.208. https://amis.ase.ro/2021/docs/AMIS2021Proceedings.pdf#page=208

Schwert, M., 2020. Does borrowing from banks cost more than borrowing from the market? The Journal of Finance, 75(2), pp.905-947. https://rodneywhitecenter.wharton.upenn.edu/wp-content/uploads/2018/11/03-18.schwert.pdf