20 HMU|ol

A CCo unting annd AssLqnment - 2 KVenkata Sai Koushna

EConomics 20131Al2 25
be Ehqinees I T

infeLmationn, pmepas4e Finol Acco unls

F o m the fo lowing
0s on 31-3-2020.
(BL-A)
Sales - 4 0 0 , o0o (T-c) Sundsy debtelS - I,20,000

CT D)
Capitol S0,00o (BL-L) COsiage tndosds 25oo

Lond -

50,00o (BL- h) Bod debls o,0 oo (PL-D)

Openinq stock - 20,000(T-D) Couaqe outuoasds - 75,000

Wage
5000 (T- D) Salaries 60000(PL- D)
Puchase zetuing - O,00o (T- De) Rent Cdit) 20000o
Interest - 500o (PL-D) CBL-L), (PL-C)
Bils payable - 3900o
Sundy udites -60poo (B-L)
Buildings 000o(BL-A
Rent to,ooo (PL-D) Puunchas esT-D)- t,ooo0o
Leons b,500 (BL-L)
BiUls Tecoivable 50 000
Fwunituuse - b b , 000 (BL-A)
CBL-A)
Adjustmenk

Stock Rs-60, O0D

O Closing
Outstanding wages
Outs Rs-to00

DoubtFul deb on Sundsuy debtRs 5

Depecialion on uanituueto'(.
Depsteiation on bui ldings @lo(.
 Tsading accownt fel the yeo endinq 3103 -2020

DT CT
Posticulaus AmouNt PastiCulasns Amout

To opening stock 20,00O By Sales q00,000

To PuchaseS loo0o0 By Closing stock 60,000-

)Retwuns loo00
0,000
TO Loaqes 5 000

t) Outstandinq lo0o 6 O00

To cO uiage
inuoasds 2500

To Gross p o f i
3,41, 5o0
C/d
4,60,0oo
Hr60,O o

PstoFit & loss acco unt t e the yeo ernding 31-03 -20 20
D
CT
Pasuticulaas Amo uNt
Poticulos Amount
To Salasies 60 000
By Gross puofit bld 3,4l,5oc
To Rent 0 o00
By Rent 2000c
To Bad Debts Loooo
Doubtful debla 6000 6 o00

To intesest 5000

To Depse ciotion on 7000

buuldings
To Depiatiom om 6oo0
fuanituwe
To casioge outwards 750oo
TO Net profit
(trans. to Copial a 1825oo
3,61 500 3,61,5o
 Balan ce shat as 31 03-2020

Liabilities Amount ASsetg Amount

60000 Land 50 000

Sunduy editeis
Bills secoivab le 5 0 0oO

Bills poyable 3000o

Debte nooobo

Outstondung ages looo eBad dcbts 6000

CapitalL Soo0o Buldings 70000

63 000o
ct) Net profit l,82,000 Dep l:(. 7000
2325oo
Fuunitue 6oooo

Leans 6 5 o0b -Dep o 6000 5o00

Closi ng stock 6000O

3,94,0oo 31,06o

Ecplain aboub Ratio anay sis in detoil

Ratio Analysis:
Ratio Anaysis Ls the pouoco8 of da mining and
inteputing numesi cal alationships based oh
financial statements.

The selatlonship of one itm to anothes expsuss ed

in simple mathemati eal fetLm is knoton as Ratio.
These atios Con be nouped inbto fou buead
categeies acceiding to the inancial activiby
Liquidiby Ratios
a Arctiviby Roatios Tunoves efficcency sabios)
3 Poofi tabiliy Rabios
4 Solvency Ratios C capital stuctue Levesage
2
otios)
Liqudity Ratios
Eo mect the
These meas L thne fums ability
shelt teum obligationg.
the as folouws
They ase again classifi ed into
rati o
a) Cuwunt satio b) uuck Ratio c) iquud
a) CuuLent ratio:

lt is bhe Tatio that eæpsoses the alationship

betoeen cwent Asset and Cuuent uabiübies

CussLent iatio
Cuent Asse

Cuswnt iabilities

uoick atto

whete CsLLnt asseltg incude

cosh in hand, cash at bank, debtets, bils

sHecoivablas, pupaid eæpenses , markatable secusibes
etc
cusuent Wabilities include
Caditers, bank oves diaPE , bilus payable, outstandir
epenses dividends payable etc.
Stondasd valun ts 21 Ci e , 2 e meie)

b) auuck ratio

It s also callled Acid-Test rotio.

It is the ratlo b/o auick ASsets and cusant
iabiitieg
uuck Ratio Quick ASsetg
Cent iabiluties
whete Quick
Quick Asses Cuent asels- (closing
stock +Prepaid exp
It should be ie mele fe a
satisfadtely
pefeimance OF the fism. Cie, 1: 1)
 c) iquid rahi
Satio ts the easuse of the iquidity
The uquid
of the Fism
Liquid asels
Liguid atio
Cwoent uabiiies

iqud assels include cosh in hand and

whee
cash a bank.

a l s o shold be mele

2- Activiy Ratios

us ually Co ned with how efficienty

These ae

of the fium a managed

the Ossels

These ae oF thsee ypes again

tuinove Ratio
i Inwentetuy
twnoves Ratio
ii) Debtei 's
iii) Cuditel's tuunoves Ratio
i)Inventey tunoves Rotio

It is olso colled Stock Tuanove Ratio

indicateg the numbe of ti mes the avesage stock
It
sold dusun9 agiven accounting peiod
is being
Cost of goods sold
Inventey TR
Avenage inventery

whee
cost of qoods sold = Sales Gross profit opersled

- Sales -Open Stockt+ Puschases + Mfg eæp

- Closing stock

Avg inwentely O/s t C/s

2
 ii Debtet's inventey atio
of ti mes the ave dabtets
It eveals the no
ase ColUllcted duusing a
9iven accouunting Paiod

Debtet'S Twunovea a t i o Cedit Sales

Aveiage Debte
Cudit sales t zefes to goods sold on
Codit
Aveage Debtels Opening debtels + Closing dabtets

iü) Caeditet's Tuundoves Ratio

It is the no of times Bhe awesoge cuditets ase

poid
paid dwing a givn accounting pnaiod

Couditel'S Tuno v e aatio =

Codit Puschas es

Avesage creditels
Avesoge aditets openi ng Credi tels+ Closing
Cvedites
2

3 Psofi bobi lity Ratios

These thuow Wght houw well the fim is
in
elganizing its activitieg a
pSLD fitable manne

They O as folows

a.) GrosS psLofiE Rotioo

G,soss Psoit
7OSS puofit votio =
x loo
Net Sales

Gs0SS Pro fit Net Sales Costof goods sold

Net sales Sales Sales retuans
b) Net poPit aatio

It i the ratio b/w net pto fits aftes toxeg and

not saleg

Net pLofit satio Net profit asts toxes

Net sales
c) bpes Lating Rabio

Opesaing atio Opeiating eapenses

Net sales

Opeiating eepenses Cost of 9ood sold + Adminst

eepenses +oFFice eæpenses +seUing & Distib.

eRpenses
In thiss cOse, highe the pacantage (of opeairg va

Louoe is the pofitability

d) Easunings pes shase:

EPS is the
lationghip biw net pofits and
the no. of shate outstandi ng at the end of
the given paaiod

E-P-S Net pofit ahtua taxeg

No of shase outstanding

e) Psu co tanihg Ratio:

This is the shase poice divided by the
eosunings P shane

Maaket pouce p shaxe

E R
Eaani n9s pe shase
 inves tment
f) Retwn on
AAA

of the fm s measUwd
The pofi tabi ity
in t e ms of ROI

Net psofit ata toxes

ROL
e Ownass
Total tnvestment
euiby

9)
Retuin un Capital Employed:

whetho the funds entusted to

It shows
the managqement have been popey used
e not
Net pofit afto taxeg
RoCE
Capital employed
Capital employed Shae copital, debentuaes
Ond ses esves etc.

h) Retuin on eauty

ROE Net photils - Dividends payable to

Paf shaj eholdes
Equuty shase copi tal

i) Retuan on Totol As sets

This lates to the total assets available to

e

equiby shaseholdess to amount invested

ROTA =
Opexating Ps ofik

To tal asets
Opexating psuofib = Net paofit -Pwfit on
Sale of
ass ets
Total as els = Cuasent assek + fixed assets
 4 Solvency Ratios
the relative intenest of the
They indica
They
and cLditets in an e n p i s e
6uones
agaundüvided into
They a
Ratio
i) Debt - Equlty
This erp lainS how fat owned fun ds ase
suffident to Pay outsi de iabiities.

Outsides' funds
Debt Equity Ratio
Instdaus' funds

outsidoss' funds =Debentuses, bond8 Log teum

o ans Cusvent Uabiübties

Insidess' funds Eaity & Psafeien ce shae copitol,

Resesves & suapus, Retained
etc
eaining5, not psoAt etc
I t Must be
Otheawise the company is in bad position

iy nteAest - coveaqe Ratio

It is calculoted to judqe the fizm's

capaciby
to
to poy the intewst on the dabt it beaows.

Tnteest covesaqe Ratio

Net puoit Befele Inteses t & taxes
Fixed interest

Fixed intesest is intesst u debent usus

e long -teum oons
Shouuld be ex poess ed in no of bimes".
5
iü) Po paietasy Ratio

Poopsuetasy satio = OwnSfundg lOO

Totol assets

nothi ng bu insi des fuun ds.

Ouoneis unds ae

Total as ets Cvent + Pixed. (excapt intangibley

iv fixed asselkboPopsi etasy funds sotio

ixed ass elg

x loo
PsLopu etets funds

v) Unent assets to Popsietasy Funds satio

Cuvant assets
loo
PLOpsietel!s unds

vi) Net welth to Debt Ratio

Net weth

Debt
oher net welth shase capital, ses esves 4suplus
Retained easni ngs , net proit ek

Debt dobentuSus, bonds, long teim leans othuy

cuwsent labilitles etc
vii) Inventeiy to weking Copital atio:
nventey
Welking capital
ohee Welki ng capital- Cuent Assets
-Cuwnt iabilibies.
 3 Eplain the natus and sCope of the manageuial economics
Nature of the Marnageial Economics

Close to Micho bcoTOMiCS

Manogeial ecoromics studies how the i m Con

use asources to pDduce meie outp ut with

minimum cest and maaimum pofit

a. Operates ogains t the backdsuop of Maao Bconomics:

w

The
The manageial economist has to be auoae of the
imits set by the macao- ecnamistic conditions such
0s 9ovesnment indluus tial poicy, inf lation and so on

33 Conconed with neimative economics:

A nemative statemenb usually includes e implieg

the wehds 'ought et should'.

4 Pesuptive acîons

These ae qeal
9eal eiented. eiven a poblem and the

biam, it sugges the of

objecti ves of the cowse
action om the available altesn atives Pel optimal

soution

APpu cotjon eliented :

Managuioal economies solves complicated psoblems
Decision making skills can be impsoved by

applying SUme PSuniples ond concepls

6 Intes-discipli nay
The tools and techniq9ues of managiol e cOnomics
0s0 dhaon fsom difeent subjec Such as eLonornics,
momoqumant, mathematics, statistics Sociolog4 etc.
9AssuMmptions & imitations:
Evey COn cept hee s bos ed on Coatain assumption
f these's a dhongt, tne thaeuy may not hold quod

6
 of Manag esuial economics
Scope
the
a of study The main Focu
refeu8 to
SCope find an
econo m'cs is to
Scope) of manaqeial
manageual poo
poo blem
blem
optimal soluution to a guven

Demand decisi ons

I
should be a basic activi ty of
Demand an alysiu
the Fi
as mamy othes activities dapend upon the
outcome oP the damandd fetecast x: Price Supply
ulated deisions
Pso fit
Puofit making is the ultimate goal of fisumns
Sevenal techniqLas Such as Beak Even
These ase

analyss, cost reducti on, ratid anaysis to ascostain

Level of psofits
the

3 Picing -Output deisions

The psicing policies, methods, sRategies& psactises
cOnstituh past of the study
decisiong
4 Input -0utpuut
The costs of inpus in sulati on to output a e
studied to optimize pouofils -SUhe Costs ase fixed,
semi- vas úable and vaiable

5 Copital ev Investment decisiong

Capitalthe foundati on of business Lack of

is
capital may e s ult in small size of opesations Henco
efticient allocotion and manogement of capital is one of
the most impetant tasks of the manaqes

6 Econumic Felecasting k Plonning

ECOnomc feiecosting
feluoasd planning Leods to

The Houm opesates Ln an ewuoument dominated

by
exteana Cqovt poici es, priCA, tomp) and intesunal
firance
facteis minimising the Tisk 4 uncoitainiby about the
the
futr
Ecplain about Elosticity of demand and its typas
with ceU-wsponding Aaphs
ELastici ty of demand:
The changes thar o ccuL in demand with chonge in
pice LS callLd a Elasticiby of Demand

To be mele accLat and apE,

opt
"

Elas ticiby of demand is a ole of sesponsivenesg

OP demand w-t changes in the deteuminans of

demand.

ELasticiby '(change in quontiby demand

of demand
'( chanqe n deteminants of
demand
Factes abheching
Natue of commodi ty 2 Time pesiod

3 Change in tnco me 4 Postponement of

COns umption
5 Tostes &Psofe-uences 6
COmplemen tay po duds
Availabiliby of substitutes 8 Pico level
q. Durnobili ty of poduc O. Goveunment Policy

Types of demand elasticiby

Ther ae H types of elastici ty of demand
Thoy O
. Puce elasticity of Demand
2 Inome elasliciby of Demand
3. CsosS elasticity of Demand
4 Advertisement 7 Psomotional elasticity of Demand.

Thee ase fwthe types in each ohich ae

division ohich onAe
as folo ws
Poico elasticity of demand:

.Paice elasticity of demand measwes chonges in

quanti by demand to a change tn Pice

I t is aluways negative which indicates that the

COns uunmes tends to buy m.ee with eveuyfau in

Puce

Price elos ticity change en antity demand

change in poie of psoduct

Poico
Deges/ Types of Elasticity of demand

i Perectly elastic:

When a small change in

Puice leods to n infinitely
Losmqe hunge in quuanbi ty Po ice
demand, it is called as

pofecty (infinibely elastic

damand 2

Ed-o Demand ob

ti) Pesfectly tnelastic:

quiantiby

I n this case, even a

laige
chan ge tn
puce Fails to
houng about a change in
P
Pu quantity demoanded
P e demand emains Cons tant

Fa-o
quantiby demand
 iii) Uni taauy ellas tici ty:
in demand s
The change
to the
Poice eæactly equal
change in pice, then
P
the elasti city ts said to
P
be unitasuy

Fd
Demand auanti by

iv) Relatively E lastic Demand

P
Small change n pouco lead
P2
D
to a veuy big chang e th

the quanti ty demanded

PrsiCe
Also called as

Meie than Uni tasy

elastiiby oF demand.
bemand quuanti ty
Ed I
v) Relatively In-elastic Denmand

A Lasige change in
ice leads to smal
P change t amo wnt

PoiCe
dem anded
P

6
Demard auanti ty
 2.Income elas iti ity of Demond

It se fets to the qLanity demanded of a

poduct
in Tesponse bo given change tn income of the Consume
It is nelmally positive, which indicat es the cons ume
tends to buy mete and Mele with ewey in caove
in income

Income elas ticity (change in quantiby demand

of demand
change in income of congumul
Deqses| Types Of Income Elas ticity of Demand:

i.High income elasticiby:

To

Income

X
uanhby demon ded
i) Loo income elas ticiby ti) Uni toes income
elasti caty

Snuom T

uantity damonde

bemand quonbity
 iv) Zeo Income elasticit v) Negative Income elasfiity

D
T
Inuome P

bemand quantity
X
demand quantiy
ET <0
3 CoOSS elasticity of Demand
This is elated to substitute e cOTmplime ntaay goods
CaoSS elas tica by Change in quantity demand of
of Demand good x

( change un pouce domand of

9ood Y
0) Substitutes ii Complementoy

Poice D
of

D
O Demond of
Demand of

H Advestising elas tiuby of

Demand ,D

Poomolianal Chaurnge in durnand expend

elas tiuby

1
Var,ti by Adv.

(
charge in experdi tus
loEEA0 Demard
5 Explain in detail about Production Funcbion 2
(e) Wsuite abouut Lau of Vaiable puoptions tn datatl
PoLoduction Fun clion:
It is a functional e l ations hip b puo ouuction

and bactehs of puo ductidn

In econo mics, the po dluction functio with one

vaiable input eæplained with the help of the

n Law
Law of vasuable Psuopeiti ons
But ws ualy this Produucti on function is of tuwo type:
a) with one vasiable tnpuut

b) with two vasuable inp uts

Lau oF vasuable potopettibns

It shows the psoduction Function with one input

foctet vOsiable while keeping the othe input factet
constaNt.

law states the types of PLo duct vi by -

This
Total pooducti vity 2 Avetage psto ductivity
3 Masuginal psoductivity.
Total Psiodiuuction

The max evel of output that can be poioduced

w Lth a gin amount of input

Avenaqe PoLo duc tion

The output pooducod R unit of input
Moiginal Paoduction

The change in total outpub poducod by the

Last unit of an input
 Thsee Stageg oF Low
The be hovio w18 oP the output ohen the vasyin

Quantiby of one factei COmbined with a fixed

gMantity of the othet can be divided th to thoee stoges
The
The thsuee stages can be bettes undestodd by the
f olowing table:

Plxed LlP Vaiable Ilp Total

Aveage Masgi nal
CLand) (Labow) Psoduct PLoduct Pooduct Stoge
20 20
1
5 2
50 25 30 Increasi ng
3 90 30 Retusins
40
5 4 120 30
30 2
5 5 23 20 Decieaing
5 6 150 25 Retun
5 7 150 21

5
3 Negadive
30
-20
Tetwung
5 9 -30

This table shows that both the aveage and

maginal puoduucb incotease at fixst and then
decline
The maiginal potoduct declines faste than the aveAage
pstoduCt

Thus, ohen moLe and mele unik Labow ae combined

with
with othe fixed factes, the total pswduct inou ases
fisst at an incseasing ole, then at a oumi ni shing
sLate and finaly be comes negotive

10
This is bette ilwsbated with the help of apsognam

60 Te

190

lo0

30- Stoge1lestage Il
Stage l
60

0-

90

-
-20

-40 MP
In this stage all thsvec incSLeage at an
Stage
i n c e0sing saLe and Continuues upto the point

ohetee avesago poduct aso incAteases is

equol to masLqinal pooduucE IE is knon ag
Stage of Inceasing Tetwuns

Stage : Totol psoducbE incleas e only at a

dimiushing
Late The aveag pouoduct also ddeclines It
COmes to an end whete total
pooduct be comes
maximum and maginal pouDduct becomes zeio
staqe of Diminishinq Retwuns ".

Stoge 3 The maginal pouo du ct becomes neqati ve

The totol psto duct also daclino8. The
aveag
potoduudt continuos bo decline This stage
of Negative Retwns ".
6 Explain the Bwak - Even Analysis in detail

Bueak Even Anaysis

Bak Even Analysis helps to identify the level of
output and sales vo ume at which the fm

hseaka even

Bok-Even point
This is the point at which the ism hos got
got
" NO
"No Loss no pofit.
i e, the point at which the total suveru i
to the totol cost ot pouoducti on
equol
.

GTaph OF Break -

Even point :

TR

sevenue time
peaiod

Angle o f incidance

Poofit zone
TC

masgin of safety
LOSS zone

TFC
Bseak-Even poin

quantity/ tide pasiod

Total Fixed Cost:

the fixed cost to be incwuud by the fiom even
It is
if it has poduu cad nothing.
Us ually it is the cost of fixed assets uke
buildings, machinery,
fwuitune etc
Totol Co st
This is the total cost ot puoduction incuuuud by
the m

Vasioable Cost
t is the duiPPeence betuoeer the Total Cost and the
Totol fixed cost
tt is called vaiable because it vasies with

puoduction qLanti ty: t incHeas es with i s e in the

quantity of pso du ction and decuases with all tn

po duuction

Angle of incidence

It is the angle at which Totol Cost cuw-ue and

Totol Revenue cwve" intensect t t h eoch othe

wide the angle, higher the psofit

NoUO Wes the angle Meie the loss es.

Bsuak -Een point

i8 the No Loss- No pstofit point i-e the point

at
at which total uvenue L8 eaal to the totol cost

Puo fIt zone

TRT
The zone of sales reyenue afte B E P is called
Puofit zone ie, TR> TC
LosS zone

The zone of revenue befele the BE P s colad

LosS zone TC TR
Magin of safety
The sught regio of potit Immedi a.tely afte the
BEP is said to be the masgin of Safetysafety
 Siqnifi conco of Bseak-Even Analys s :

It is an impettant toot Pe a busine fel decision

makin
It helps in deteumining the contibution of eadh Prod
prod

IE hellps in detemi ning equired salas at a

given level of psofit

To Compase the efficieny of a fm.
To decide whethe to inceage the poduction e

decuase the psto duction.

Limitotions
It is only applicoble Fet sheit Run Because in
in
Long-Rn al cost becomhe vasiable cost. Thase
wil be no flxed Cost

Thee eeists SOme semi vasuiable costs

I t is applicable to singla puoduct isms thase Oe
psoblems in appu cotion to muulti -puoduCt fioms

It doesn't psoduco stable results in volatile

businesS Conditions

APplications:
1. Make et Buy decisians

2 DebeiminaUi on of Psuoduct mie

3 D3Op e Add poduct decisi ons

44 Change in sales & vasiable Cost