Concepts and Basic Functions

Economics
a social science concerned chiefly with description
and analysis of the production, distribution and
consumption of goods and services.
 Agricultural Economics
is an applied social science dealing with how
mankind chooses to use technical knowledge and scarce
productive resources such as land, labor, capital, and
management to produce desired level of output and to
distribute it for consumption to various members of
society over time.
Engineering Economy
Concerned with the economic aspects of
engineering and involves the systematic
evaluation of the costs and benefits of proposed
technical and business projects and ventures.
a. management c. economics
b. entrepreneurship d. agricultural
economics
1. What is the organization, management
and assumption of risks of a business?
 ANSWER: b. Entrepreneurship

Enterprise-a venture or project usually designed

for profit.
Entrepreneurship-the organization, management,
and assumption of risk of a business or enterprise.
Management – it is the exercise of control over a
business, enterprise or company.
Agricultural Economics
It seek to discover cause-effect relationships.
It uses the scientific method of economic theory
to find answers to problems in agriculture and
agribusiness.
 Basic Functions
1. To determine what goods and services are to be produced.
2. To organized the production of goods and services to conform
to the wishes of the consumers.
3. To distribute the product.
4. To maintain or increase production over time when necessary.
5. To establish a favorable demand and supply relationship in the
market.
 ANSWER: e. All of the Above

2. Which of the following is the application of

engineering economy?
a. Selection among alternative designs/projects.
b. Estimation of costs of improvements in a factory or a
farm.
c. Determining when to replace old equipment with new
ones.
d. Choosing between leasing or purchasing assets
e. All of the above
 Basic Terms

Accounting
-the process of recording all transactions of an
enterprise which affect investments of capital so
that at any time, the result of the investment may
be known.
 Basic Terms

Capital Rationing
-the allocation of scarce capital among
alternatives in such a way as would yield.

Partial Budgeting
-the method of making a comparative study of
costs and returns analysis resulting from a
change in a part of the business organization.
 Basic Terms

Balance Sheet
-a financial summary showing the relationship
among assets, liabilities and ownership in the
enterprise as of a given time.

- an enumeration of the nature and amount of

assets, liabilities and ownership of the company
 Fundamental Accounting Equation
Assets = Liabilities + Ownership (owner’s equity)

Assets –anything of value possessed by an enterprise.

Liabilities-debts or claims of anyone other than the owners of the property upon the assets of the company.
Equity –claims of anyone against the assets of the enterprise.
 ANSWER: d. current liabilities

a. fixed assets c. current assets

b. fixed liabilities d. current liabilities
3. This mature within a short time, usually a year
which includes wages, short term debts and
prepaid income.
 Types of Assets
Fixed Assets
-are properties that cannot be readily converted into cash
like buildings, land, machinery and equipment and furniture’s.
Current/Liquid Assets
-it includes cash, accounts receivable within a short time or
within the present accounting period like raw materials, goods in
the process of production, finished goods ready for sale, prepaid
expenses –(money paid for materials not yet delivered or services
not yet rendered to the company like insurance, rentals).
 Types of Liabilities

Fixed Liabilities
-those debt or claims which are not due for payment until
sometime in the future, usually after a period exceeding one year.

Current Liabilities
-those debt or claims which mature within a short time,
usually a year which include wages, short term debts, and prepaid
income (income paid for goods not yet delivered or services not
yet rendered).
 ANSWER: d. corporation

a. owner c. partnership
b. Sole proprietorship d. corporation
4. What is the entity that involves stockholders.
 Ownership or Proprietorship
-represents the investment of a person or several
persons in the enterprise.

Types of Ownership
1.Individual/Sole Proprietorship – single owner
2.Partnership –two or more partner (family members/
friends)
3.Corporation –a large company or group of companies
authorized to act as a single entity and recognized as
such in law.
- shares of common and preferred stocks of
investors.
Financial ratios – used to measure the risks and returns of an enterprise

FINANCIAL RATIOS
Ratio Calculation Meaning
Liquidity ratio
Current ratio Current assets The extent to which a firm can meet
Current liabilities its short-term obligations
Leverage ratio
Debt-to-total assets Total debt The percentage of total funds that are
ratio Total assets provided by creditors
Activity ratio
Inventory turnover ________Sales__________ Whether a firm holds excessive
Inventory of finished goods stocks of inventories and whether it
is selling its inventories slower than
the industry average
Profitability ratio
Return on stockholders’ _______Net income_______ After-tax profits per peso of
equity Average stockholders’ equity stockholders’ investment in the firm
Growth ratio
Sales Annual percentage growth in Firm’s sales growth rate
sales
 Competition
Perfect Competition
-it occurs when any given product is no restriction on
additional vendors entering the market.

Perfect Monopoly
-it exists when a unique product or service is available from
only a single seller and that seller can prevent the entry of others
in the market.

Oligopoly
-it exists when there are so few suppliers of the product or
service that action by one will almost inevitably result in similar
action by other.
 ANSWER: c. value

a. benefit c. value
b. Utility d. entitlement
5. It is the worth that a person attaches to an
object or service.
 Economic Cost

Utility
-the power of a good or service to satisfy human wants;
inherent not in the object but in the regard that a person has for it.

Value
-it designates the worth that a person attaches to an object
or service; it is the measure of utility and is expressed as the price
that must be paid to obtain a particular item.

Benefit
-it is the payment (allowance/entitlement) received under
an annuity or pension plan.
 ANSWER: b. first cost

a. Life-cycle cost c. fixed cost

b. First cost d. non-recurring cost
6. The cost associated with the initial investment
of the business enterprise that happens only
once.
 Economic Cost
Fixed Cost
- it is unaffected by changes in activity level over a feasible range of operations
for the capacity or capability available.
(ex. Taxes, general management and administrative salaries, license fees,
interest on borrowed capital).

First Cost (initial/investment cost)

- it is the cost of getting an activity started and occurs only once for any given
activity.

Life-Cycle Cost
- it is the summation of all costs, both recurring and non-recurring, related to a
product, structure, system or service during its lifespan.

Non-recurring Cost
- it is not repetitive even though the total expenditure may be cumulative over a
relatively short period of time. (ex. Cost of constructing a building/plant)
 ANSWER: a. sunk cost

a. Sunk Cost c. Opportunity Cost

b. Direct Cost d. Variable Cost
7. It is one that occurred in the past and has no
relevance to estimates of future costs and
revenues related to an alternative course of
action
 Economic Cost
Variable Cost
-are those associated with an operation that will vary in total with the quantity
of output.

Direct Cost
-are those that can be reasonably measured and allocated to a specific output
or work activity.

Indirect Cost(Overload Cost or Burden)

-are those that are difficult to attribute or allocate to a specific output or work
activity.

Opportunity Cost
-is the cost of the best rejected (foregone) opportunity and is often hidden or
implied.
 ANSWER: b. Gross Income

a. Gross Revenue c. Capital Loss

b. Gross Income d. Capital Gain
8. Total of all income from revenue-producing
sources less all operating expenses.
 Terminology
Capital Gain
_a gain incurred when selling price of property exceeds the purchase price.

Capital Loss
-is incurred if the selling price is less than the book value

Gross Revenue
-are total revenues from sale of goods plus income from dividends, interests,
rent, royalties and gains on the exchange of capital assets.

Gross Income
-are total of all income from revenue-producing sources less ordinary and
necessary operating expense including cost of goods and interests.