You are on page 1of 15

BASICS OF FINANCIAL ACCOUNTING

NAME :

MATRICULATION NO :

IDENTITY CARD NO :

TELEPHONE NO : EMAIL :

CONTENT

PAGES

1.0

INTRODUCTION

2.0

MALAYSIAN ACCOUNTING STANDARS BOARD (MASB)

3.0

AIRASIA BERHAD 3.1 3.2 3.3 3.4 Company Background AirAsias Vision and Mission AirAsias Strengths and Weaknesses FINANCIAL STATEMENT OF AIR ASIA

4 4 5 5 6

4.0

MALAYSIA AIRLINES (MAS) 4.1 4.2 4.3. Company Background Malaysia Airlines Financial Highlights Strengths and Weaknesses 4.3.1 4.3.2 Market Leading Positions Focus On Branding Branding is a Key Element of LNCs Strategy 4.3.3 4.3.2 4.3.3 Weakness of The Annuity Business Sensitivity to Equity Markets Weak Operating Performance

7 7 8 8 9

9 9 9 9

5.0

10

6.0

11

7.0

CONCLUSION

18

8.0

REFERENCES

19

1.0

INTRODUCTION

1. The market forces of Supply and Demand.

a. Plotting the Demand and supply Curve. The following Table Illustrates the values used in the plotted graphs.

Price Per Unit (\$)

Quantity Demanded

Quantity Supplied

8 6 4 2 1 0.5

1 2 3 4 5 6

10 8 6 4 2 0

9

Price of each comic book

5 Demand Supply 4

0 0 1 2 3 4 5 6 7 8 9 10 Quantity of comic books

b. Finding the Equilibrium point Plotted on the graph, as well as seen clearly in the table, the equilibrium is established for the price of \$2.00. In fact, at this price, the supply equals the demand at 4 units.

c. The Law of Demand and the Law of Supply (Price Increase) According to the Law of Demand, if all other things remain constant, an increase of price (from the equilibrium price of \$2) to \$6 would decrease the quantity of comic books demanded to 2. Similarly, also provided all other things remain constant, the Law of Supply dictates that the number of comic books supplied would rise to 8. This creates a situation of excess supply, or surplus, and would lead to an increased inventory size for the suppliers.

d. The Law of Demand and the Law of Supply (Price Decrease) The Law of Demand and the Law of Supply apply also in this case of price decrease under the price of equilibrium of \$2. Ceteris Paribus, the decrease in price to \$1 would raise the quantity demanded to 5 and drop the quantity supplied to 2. This creates a situation of excess demand (shortage) and reduces the size of suppliers inventory.

e. The effect of income on the demand curve. Income is a determinant of demand. The Increase of income would increase the demand for comic books, which are considered to be normal goods. To obtain the new demand values, 3 units must be added for every price. The results are displayed in the table below.

Price Per Unit (\$)

Quantity Demanded

Quantity Supplied

New Quantity Demanded

8 6 4 2 1 0.5

1 2 3 4 5 6

10 8 6 4 2 0

4 5 6 7 8 9

This increase of demand shifts the demand curve to the right, as illustrated in the updated graph below. This graph is the same as in (a) but the shifted demand curve has been added as a dotted line.

9

0 0 1 2 3 4 5 6 7 8 9 10 Quantity of comic books

f. Updated Equilibrium after Curve-Shift As seen from the updated table and the updated graph, the demand meets the supply at the quantity of 6. The equilibrium price is therefore \$4.

2.0

CONCEPT AND THEORIES OF UTILITY

In economics, utility is a measure of the happiness or satisfaction gained from a good or service. The concept is applied by economists in such topics as the indifference curve, which measures the combination of a basket of commodities that an individual or a community requests at a given level(s) of satisfaction. The concept is also used in utility functions, social welfare functions, Pareto maximization, Edgeworth boxes and contract curves. It is a central concept of welfare economics. The doctrine of utilitarianism saw the maximisation of utility as a moral criterion for the organisation of society. According to utilitarians, such as Jeremy Bentham (1748-1832) and John Stuart Mill (1806-1876), society should aim to maximise the total utility of individuals, aiming for 'the greatest happiness for the greatest number'. Utility theory assumes that humankind is rational. That is, people maximize their utility wherever possible. For instance, one would request more of a good if it is available and if one has the ability to acquire that amount, if this is the rational thing to do in the circumstances.

2.1

Cardinal Utility

Utility was originally viewed as a measurable quantity, so that it would be possible to measure the utility of each individual in the society with respect to each good available in the society, and to add these together to yield the total utility of all people with respect to all goods in the society. Society could then aim to maximise the total utility of all people in society, or equivalently the average utility per person. This conception of utility as a measurable quantity that could be aggregated across individuals is called cardinal utility. Cardinal utility exists if the utility derived from consumption is measurable in the same way that other physical characteristics--height and weight--are measured using a scale that is comparable between people. There is little or no evidence to suggest that such measurement is possible and is not even needed for modern consumer demand theory and indifference curve analysis. Cardinal utility, however, is often employed as a convenient teaching device for discussing such concepts as marginal utility and utility maximization. Cardinal utility quantitatively measures the preference of an individual towards a certain commodity. Numbers assigned to different goods or services can be compared. A utility of 100 units towards a cup of coffee is twice as desirable as a cup of tea with a utility level of 50 units. 6

The concept of cardinal utility suffers from the absence of an objective measure of utility when comparing the utility gained from consumption of a particular good by one individual as opposed to another individual. For this reason, neoclassical economics abandoned utility as a foundation for the analysis of economic behaviour, in favour of an analysis based upon preferences. This led to the development of tools such as indifference curves to explain economic behaviour. In this analysis, an individual is observed to prefer one choice to another. Preferences can be ordered from most satisfying to least satisfying. Only the ordering is important: the magnitude of the numerical values are not important except in as much as they establish the order. A utility of 100 towards an ice cream is not twice as desirable as a utility of 50 towards candy. All that can be said is that ice cream is preferred to candy. There is no attempt to explain why one choice is preferred to another; hence no need for a quantitative concept of utility. It is nonetheless possible, given a set of preferences which satisfy certain criteria of reasonableness, to find a utility function that will explain these preferences. Such a utility function takes on higher values for choices that the individual prefers. Utility functions are a useful and widely used tool in modern economics. A utility function to describe an individual's set of preferences clearly is not unique. If the value of the utility function were to be, for e.g., doubled, squared, or subjected to any other strictly monotonically increasing function, it would still describe the same preferences. With this approach to utility, known as ordinal utility it is not possible to compare utility between individuals, or find the total utility for society as the Utilitarians hoped to do.

2.2

Ordinal Utility Theory

Ordinal utility theory was argues that a consumer cannot measure satisfaction numerically or subjectively instead she can rank the different baskets or bundles so as to choose the best basket. A method of analyzing utility, or satisfaction derived from the consumption of goods and services, based on a relative ranking of the goods and services consumed. With ordinal utility, goods are only ranked only in terms of more or less preferred, there is no attempt to determine how much more one good is preferred to another. Ordinal utility is the underlying assumption used in the analysis of indifference curves and should be compared with cardinal utility, which (hypothetically) measures utility using a quantitative scale.

3.0

THE CARDINAL UTILITY APPROACH

The cardinal school postulated that utility can be measured in monetary units (i.e., by the amount of money that the consumer is willing to sacrifice for another unit of a commodity) or by subjective unit called utils.

Assumptions i) Rationality:- the consumer is assumed to be rational since that he/she aims at the maximization of his/her utility subject to the constraints imposed by his/her income. ii) Cardinal utility: - the utility of each commodity is measurable, with the most convenient measure being money. iii) Constant marginal utility of money:- the utility that one derives from each successive unit of money income remains constant. iv) Diminishing marginal utility (DMU):- the MU of a commodity diminishes as the consumer acquires more and more of it. v) Additively of utility: - even though dropped in the latter version of the approach, utility was assumed to be additive in the earlier version. That is: U = U1(X1) + U2(X2) + --- + Un (Xn) vi) The total utility of a basket of goods and services depends on the quantities of individual commodities. That is: U = f(x1, x2 xn) the

Equilibrium of the Consumer Lets assume that the consumer consumes a single commodity, x. The consumer can either buy x or retain his money income Y. Under these conditions the consumer is in equilibrium when the marginal utility of X is equated to its market price (px). Symbolically, MUx = Px Mathematically, we can derive the equilibrium of the consumer as follows: The utility function is U = f (qx), where utility is measured in monetary units and qx is the quantity of x consumed by the consumer. 8

If the consumer buys qx, his/her expenditure is pxqx. Presumably the consumer seeks to maximize the difference between his/her utility and total expenditure. That is: U Pxqx The necessary condition for a maximum is that the partial derivative of a function with respect to qx be equal to zero. Thus, d (U pxqx) = O dqx > dU dqx > dU - px dqx > dU dqx > MUx = Px If MUx > Px, the consumer can increase his/her welfare by purchasing more unit of X, and if the MUx < Px, welfare can be increased by reducing the consumption of X. In the case there are more commodities, the condition for optimality of the consumer is the equality of the ratios of MU of the individual commodities to their prices, i.e. the utility derived from spending an additional unit of money must be the same for all commodities. MU1 = MU2 = .. = P1 P2 MUn Pn = px dqx dqx dqx = O d (pxqx) = O

Derivation of the Demand Curve The derivation of demand is based on the axiom of diminishing marginal utility. The MU of commodity X is depicted by a line with a negative slope which is the slope of total utility function, U =f(qx). As successively increasing quantities of X are consumed, the total utility increases but at a decreasing rate (recall the assumption of DMU), reaches a maximum at quantity X* and then starts declining. Accordingly, the MUx declines continuously and becomes negative beyond X*.

MUx = slope of TUx = dTU dqx

10

Thus it can be shown that the demand curve for commodity X is identical to the positive segment of the MUx curve. For example, at X1 the MU is MU1 which is equal to P1 at the optimum point. Hence at P1 the consumer demands X1 quantity. Similarly at X2 the marginal utility is MU2 which is equal to P2. Hence at P2 the consumer demands X2 and so on. This forms the demand curve for commodity X. As negative price do not make sense in economics, the negative potion of MUx does not form part of the demand curve.

X1

X2

X3

X* 11

Panel B: The demand curve

The demand curve is simply the graphical representation of the relationship between price and quantity demanded.

4.0

DIFFERENCE BETWEEN CARDINAL AND ORDINAL UTILITY

The basic concept in this approach is utility which refers to satisfy power that a good or service consumed possesses in this approach, it is assumed that a consumer assigns a cardinal major which can be counted. This means that a consumer can tell exactly how much satisfaction she can derive from consumption of a certain goods. The theory assumes a cardinal measure in units called utils, using an instrument called utilometer ,however some economics have suggested that utility can be measured in monetary units by the amount of money offered for a commodity. On the other hand the ordinal utility approach which argues that a consumer cant measure satisfaction numerically or subjectively. The ordinal utility is also commonly known as indifference curve theory because its analysis is based on on indifference curve. Indifference curves are psychological levels of satisfaction hence are more hypothical then real.

5.0

CONCLUSION

Financial statements including income statement, balance sheet, and cash flow statements provide important information for managers, employees, investors to assist in making informed business decisions. Financial managers must have thorough understanding of accounting principles to allocate the companys financial resources to generate the highest returns for the company. In addition, the use of financial accounting may be used to make ethical decisions impacting the companys performance and other stakeholders.

12

8.0

REFERENCES

AirAsia website www.airasia.com.my

Businesscases.org,Case Nos. 00068.Retrieved January 20, 2006 from: http://www.businesscases.org/newInterface/sample.pdf Stakeholders expansion plan. (2005, November 26). support AirAsia

Finance Committee on Corporate Governance (1999), Report on Corporate Governance, 1st ed, Securities Commission, Malaysia.

13

http://en.wikipedia.org/wiki/Dividend#Forms_of_payment

http://dividendmoney.com/the-dividend-payout-ratio-explained/

Jensen, Michael C., 1986, Agency Cost of Free Cash flow, Corporate Finance, and Takeovers, The American Economic Review, 76, 323-329 Retrieved January 27, 2006, from KLSE Web site:http://www.klse-ris.com.my/html-dir/intro1.html

Low-cost carrier.(n.d.). Retrieved January 20, 2006 from: http://www.answers.com/topic/low-cost-carrier airline business. Piercy, N. (2000). Reinventing the

Miller, Merton H. and Franco Modigliani 1961, Dividend Policy, Growth, and the valuation of shares, the Journal of Business, 34, 411-433.

Spence, Michael, 1974, Competitive and Optimal Responses to Signals: An analysis of efficiency and distribution, Journal of Economic theory, 7, 296-332. The New Straits Times,BIZWEEK p.B6.The skys the limit. (2006, April 1).

The thrills of no-frills: discount carriers are taking off in Asia.(2003, December 19). Retrieved January 20,2006 B.A. from (2002,

14