Engineering Economics & Accountancy

Unit – 1: Introduction to Economics & Managerial Economics

1. What is Economics? Explain Nature & Scope of Economics.
Definition:
Economics is defined as the social science that deals with the production, distribution,
and consumption of goods and services.
Nature:
The nature of economics deals with the question that whether economics falls into the
category of science or arts.
Economics as a Science:
Science deals with systematic studies that signify the cause and effect relationship. In
science, facts and figures are collected and are analysed systematically to arrive at any
certain conclusion.
However, economics is treated as a social science because of the following features:
▪ It involves a systematic collection of facts and figures.
▪ Like in science, it is based on the formulation of theories and laws.
▪ It deals with the cause and effect relationship.
Economics as an Art:
It is said that “knowledge is science, action is art.” Economic theories are used to solve
various economic problems in society. Thus, it can be inferred that besides being a
social science, economics is also an art.
Scope:
Economists use different economic theories to solve various economic problems in
society. Its applicability is very vast.
Microeconomics:
Microeconomics examines individual economic activity, industries, and their
interaction. It has the following characteristics:
▪ Elasticity:
It determines the ratio of change in the proportion of one variable to another
variable. For example- the income elasticity of demand, the price elasticity of
demand, the price elasticity of supply, etc.
▪ Theory of Production:
It involves an efficient conversion of input into output. For example- packaging,
shipping, storing, and manufacturing.
▪ Cost of Production:
With the help of this theory, the object price is evaluated by the price of
resources.
▪ Monopoly:
Under this theory, the dominance of a single entity is studied in a particular
field.
▪ Oligopoly: It corresponds to the dominance of small entities in a market.
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Macroeconomics:
It is the study of an economy as a whole. It explains broad aggregates and their
interactions “top down.” Macroeconomics has the following characteristics:
1) Growth:
It studies the factors which explain economic growth such as the increase in
output per capita of a country over a long period of time.
2) Business Cycle:
It advocates the involvement of the central bank and the government to
formulate monetary and fiscal policies to monitor the output over the business
cycle.
3) Unemployment:
It is measured by the unemployment rate. It is caused by various factors like
rising in wages, a shortfall in vacancies, and more.
4) Inflation and Deflation:
Inflation corresponds to an increase in the price of a commodity, while deflation
corresponds to a decrease in the price of a commodity. These indicators are
valuable to evaluate the status of the economy of a country.
2. Explain Causes & Effects of Inflation in INDIA. Explain measures to control it?
Inflation refers to the rise in the prices of most goods and services of daily or common use,
such as food, clothing, housing etc.
Causes of Inflation:
• Increase in money supply due to various reasons, such as wars and expansion of
bank credit or deficit financing, causes a rise in the money income of the people
leading to a rise in demand for goods.
• Increase in government expenditure on large development project.
• An increase in the disposable income of the consumers leads to an increase in the
demand for goods and services.
• A fall in the saving ratio.
Effects of Inflation:
1) Mild inflation is beneficial for the economy because it stimulates production,
employment and income. When prices rise, costs do not rise immediately as a
result profit increases and it encourages further investment.
2) Effect on producers:
Producers and traders gain during inflation. Prices rise much more than
production cost because production cost remains more or less fixed in short
run and do not increase.
3) Effect on wage and salary earners:
People earning wages and regular salaries suffer during inflation because
salaries and wages in a lesser proportion to there is in price.
4) Effect on fixed income group:
The worst affected group during inflation is this group because their income
is fixed but the cost of living increases due to rising prices.
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5) Effect on formers:
Formers gain during inflation because the prices of farm products increase
much faster than production cost leading to higher profits.
Control of Inflation:
1) Direct measures:
It includes direct control on prices and rationing of scarce goods. Government
imposes certain price control on certain goods and should not allow it to rise
further.
2) Fiscal measures:
• Reducing government expenditure on unproductive works will have a
stabilizing effect during inflationary periods
• Encouraging the public to scarify their current consumption will also reduce
demand.
• Government can also introduce compulsory savings scheme by deducting
certain amount from wages & salaries to be credited to workers savings
account.
3) Monetary measures:
1. By restricting bank audit, RBI reduces the volume of money supply by selling
government securities in the open market.
2. Money supply can be controlled by increasing the rate of interest to reduce
borrowings.
4) Other measures:
• Inflation can be controlled by diverting resources towards the production of
necessary commodities, instead of luxury items.
• Government should try to restrict the growth rate of population.
3. What is Managerial Economics? Describe its features & scope to enable
decision making function.
It means application of economic theory to the problems of management. The prime
function of a management executive in a business organization is decision making and
forward planning.
Significance of Managerial Economics:
• What products and services should be produced?
• What inputs and production techniques should be used?
• How much output should be produced and at what prices it should be sold?
• What are the best sizes and locations of new plants?
• How should the available capital be allocated?
• In what project investments should be made? Etc.,
Characteristics of Managerial Economics:
1. Microeconomics:
It studies the problems and principles of an individual business firm or an industry.
2. Normative economics:
It is concerned with varied corrective measures that a management undertakes
under various circumstances.
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3. Pragmatic:
In pure micro-economic theory, analysis is performed, based on certain exceptions,
which are far from reality. However, in managerial economics, managerial issues are
resolved daily and difficult issues of economic theory are kept at bay.
4. Uses theory of firm:
Managerial economics employs economic concepts and principles, which are known
as the theory of Firm or ‘Economics of the Firm’. Thus, its scope is narrower than
that of pure economic theory.
5. Takes the help of macroeconomics:
Knowledge of macroeconomic issues such as business cycles, taxation policies,
industrial policy of the government, price and distribution policies, wage policies and
antimonopoly policies and so on, is integral to the successful functioning of a
business enterprise.
6. Aims at helping the management:
Managerial economics aims at supporting the management in taking corrective
decisions and charting plans and policies for future.
7. A scientific art:
Managerial economics has been is also called a scientific art because it helps the
management in the best and efficient utilization of scarce economic resources. It
considers production costs, demand, price, profit, risk etc.
8. Prescriptive rather than descriptive:
It not only describes the goals of an organization but also prescribes the means of
achieving these goals.
Scope of Managerial Economics:
The scope of Managerial Economics is so wide that it covers almost all the problems and
areas of managers and the business firm. It provides adequate amount of guidance to
business executive in running a business enterprise on prudent commercial practices.
1. Demand Analysis & Demand Forecasting:
It helps in identifying the various factors influencing the demand for a firm’s product
and thus provides guidelines to manipulate demand in future.
2. Production Function:
Once demand is estimated, the next requirements is to identify the sources of
production, Sales of production, establishing relationship among factors production
[Land, labour, capital and organization]
3. Cost Analysis:
It helps in the determination of cost, the methods of estimating cost, the
relationships between cost and output.
4. Inventory Management:
It refers to stock of raw-material which a firm keeps. The problem is how much of
inventory is the ideal stock. If it is high, unnecessarily capital will be blocked and as a
result of which firm loses an opportunity of making good profit. If inventory is low,
production will be adversely affected. So, manufacturing firm will have to minimize
inventory cost.
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5. Advertising:
advertising is an integral part of decision –making and forward planning in increasing
demand.
6. Pricing:
The success of a business firm largely depends on the correctness of the price
decision taken by it.
7. Profit Management:
The success of any business can be measured by its profits in the long – run. If the
knowledge about the future was perfect, profit analysis would have been a very easy
task.
8. Capital Budgeting:
Capital is scarce and it has a price. So, one has to utilize scarce capital in the best
manner possible so as to get the best out of it.
4. Define and Explain about the factors influencing for the following:
a. Demand of a Product/Service
b. Elasticity of Demand
c. Demand Forecasting
a) Demand of a Product/Service:
Demand is an economic principle referring to a consumer's desire to
purchase goods and services. It depends upon:
1. Income:
When an individual's income rises, they can buy more expensive products
or purchase the products they usually buy in a greater volume.
2. Price:
The laws of supply and demand dictate that if the cost of a particular
product rises, demand will decrease.
Ex: If the price of crude oil goes up, the cost of petrol will rise in gas
stations. Therefore, depending on the income of the consumer, they will
drive less to conserve gas.
3. Expectations, tastes, and preferences
If consumers suspect that the price of a product will rise in future, the
demand for said product will increase in the present. For example, if
there is a rise in petrol prices forecast for the coming week, motorists will
fill up today.
4. Customer base
One of the most important determinants of demand is the size of the
market. The more consumers want to purchase a product, the faster
demand will rise.
5. Economic conditions
Consumer’s perceptions of the economy affect their propensity to
consume.
To illustrate, if consumers are confident their jobs are secure, they are
more likely to spend.
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b) Elasticity of Demand:
“Law of Demand” tells us that when price of the commodity rises the demand will
fall and when fall in price, demand will rise. Though the law of demand explains the
inverse relationship between price and quantity purchased, it fails to explain by how
much the quantity demanded increases as a result of a fall in the price or vice versa.
So “Elasticity of Demand” comes into hand describing the quantitative change of
demand.
There are 3 types of Elasticity of Demand:
1. Price Elasticity of demand:
The price elasticity of demand may be defined as the ratio of the percentage
change in demand to percentage change in price.

2. Income Elasticity of Demand:

The Income Elasticity of demand is defined as a ratio of percentage or
proportional change in the quantity demanded to the percentage change in
income.
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3. Cross Elasticity of Demand:
This may be defined as “the Proportionate change in the quantity demanded of a
particular commodity in response to a change in the price of another related
commodity [related commodity may be substitute or complementary good].

Significance:
• It guided the business in fixing the right price for commodity.
• It decides the level of production.
• It helps in determining rewards to factors of production.
• It will also influence wages.
• It helps government before fixing or imposing price control on good.
• It helps government in formulating tax policies.
• It helps in deciding about industrial and Economic policies.
c) Demand Forecasting:
Demand forecasting is an estimation of the future demand for any product. one has to
decide about the future demand, such that he can plan his investment strategy. There is
no meaning in producing if there is no market for the said products. So, necessary steps
should be taken to know the future such that we can plan our strategy to meet the
demand in near future is called as demand forecasting.
Significance:
• Helps in Inventory management
• Helps in Sales management
• Helps production department in maintaining proper levels of stores and raw
material by that it reduces unnecessary burden on financial management
• Helps finance department to provide funds for various purposes from various
sources without much difficulty
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Factors Involved:
1. Forecast Period
2. Level of Forecasting
3. Should the forecast be general or specific?
4. Type of forecasting method
5. Classification of products
6. Nature of competition in the market.
7. What people think about products and brands?
Forecasting methods:

5. Explain Law of Demand with assumptions & exceptions.

“Law of Demand” explains the inverse relationship between the demand and price.
Assumptions:
• No change in consumer’s taste and preferences.
• Income of the consumer should remain constant.
• Prices of other goods should not change.
• There should be no substitute for the commodity or prices of substitutes remain
unchanged
• The demand for the commodity should be continuous, means it is not of a seasonal
profit.
• People should not expect any change in the price, availability of product and his
income in near future.
Exceptions:
• Veblen goods:
The law does not apply to the commodities which serve as ‘Status Symbol’, enhance
‘Social Prestige’ or display wealth and richness. Ex: gold
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• Giffen goods:
Giffen goods does not mean any specific commodity. It may be any commodity much
cheaper than its substitutes, consumed by the poor households as essential
consumer goods.
• Speculative effect:
In case of share trading, when there is an exception of further rise in the prices of
shares, the demand will grow more and more even with a rising prices and vice
versa.
• Ignorance of costumer:
Some consumers think that the product is superior if the price is high and vice-versa.
• Fear of Scarcity:
If the consumer thinks that the product may not be available in adequate quantities
in near future due to certain reasons, he will definitely purchase more quantities at
current prices[ Even though price is high] with the fear of scarcity or if thinks that
there may be any increase in the price of product in near future, he may buy more at
higher prices
6. Explain difficulties in measuring of National Income.
National Income is the money value of all final goods and services produced in a country
during a period of one year.
Difficulties:
1. Prevalence of Non-Monetized Transactions:
Agriculture in which a major part output is consumed at the farm level itself.
The National Income statistician, therefore has to face the problem of finding
a suitable measure for this part of output.
2. Illiteracy:
The majority of people in India are illiterate and they do not keep any
accounts about the production and sales by this product. Under the
circumstances the estimate of production and earned incomes are simply
guess work
3. Occupational specialization lacking:
Besides the crop, farmers, are also engaged in supplementary operations like
dairy, poultry, cloth making, etc. But income from such productive activities is
not included in the NI estimation.
4. Difficulties of avoiding double counting system:
For example, of the value of the output of sugar & sugarcane are counted
separately. The value of sugarcane utilised in the manufacturing of sugar will
have been counted twice, which is not proper.
5. Value of Leisure:
The satisfaction we got from recreational activities and other uses of our
leisure time are also not included.
6. Cost of environmental damage:
The cost of environmental damage is not subtracted from the market value
of final products when NI is calculated.
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Unit – 2: Forms of organizing Private & Public-Sector Business Enterprises
1. Explain the features of Sole Proprietorship business and State its merits,
demerits, limitations and suitability.
The business organization in which a single person owns, manages and controls all the
activities of the business is known as sole proprietorship form of business organization.
Features:
• Ownership by a Single Person:
A single person initiates a business whose ownership lies in his hands. He
enjoys full powers to fix the lay-out of his business firm.
• Organization and Control:
A single person organizes and manages his entire business according to his
experience and efficiency.
• Capital:
The owner uses his own capital. He may also borrow capital to invest it in his
business and thereby expand it.
• No Sharing of Profits and Losses:
All the profits of business earned by the owner are enjoyed by him alone.
• Unlimited Liability:
His liability is unlimited for all his debts. If he fails to clear his business debts,
all his private property can be attached by his creditors.
• Easy to Form:
It can be easily set up. It is not subject to any special legislation. So, no legal
formalities are involved in starting such a concern by any person who is of
major age, i.e. 18 years and above.
Merits:
• Easy started & winding up.
• Prompt action
• Personal Interest
• Direct contact with customers
• Efficiency, Hard work & Direct gain
• Business Secrecy
• Self-Employment
• Lower Tax Burden
De-Merits:
• Limited capital
• Unlimited risks
• Lack of skill for efficient management
• Weakness in bargaining
• Wrong decisions
• Closure on death
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2. Define partnership business & explain its salient features & types of partners.
The Indian Partnership Act, 1932, defines the partnership as “the relation between two or
more persons who have agreed to share profits of a business carried on by all or any one of
them acting for all.”
Features:
• Members: Minimum = 2 & Maximum = 10 (for banking) , 20 (for other)
• Agreement:
Whenever you think of joining hands with others to start a partnership business, first
of all, there must be an agreement between all of you. This agreement contains so
o The amount of capital contributed by each partner
o Profit or loss sharing ratio
o Salary or commission payable to the partner, if any
o Duration of business, if any
o Name and address of the partners and the firm
o Duties and powers of each partner
o Nature and place of business
o any other terms and conditions to run the business.
• Unlimited Liability:
All partners are, jointly and severally, held responsible for the losses or debts of the
firm to the full extent of their personal assets.
• A Partnership Deed:
A partnership is formally based upon a partnership deed or agreement. It indicates
the names of partners, the shares of individual partners in the capital, their rights
and duties, proportion for sharing profits and losses by each of them etc.
• Registration:
The registration of a partnership firm is voluntary. It may or may not be registered.
However, if the partners so desire, it can be registered at any time.
• No Remuneration:
No remuneration is paid to any partner for services rendered by him to the firm
• Age:
Only persons who have attained the major status can become partners. In other
words, minors cannot become partners
Types of Partners:
• Active Partners:
The partners who actively participate in the day-to-day operations of the business
are known as active or working partners.
• Dormant Partners:
Those partners who do not participate in the day-to-day activities of the partnership
firm are known as dormant or sleeping partners
• Nominal Partners:
These partners only allow the firm to use their name as a partner. They do not invest
any capital, or share profits and also do not take part in the conduct of the business
of the firm.
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• Minor as a Partner:
In special cases a minor can be admitted as partner with certain conditions. A minor
can only share the profit of the business. In case of loss his liability is limited to the
extent of his capital contribution for the business.
• Partner by Estoppels:
The person who falsely represents himself as a partner is known as partner by
estoppel.
• Partner by Holding out:
A person who is not actually a partner of a firm but knowingly allows himself/herself
to be represented as a partner of the firm is known as partner by holding out
3. Explain the formation of Joint-stock company with its features & the reasons
for Joint stock company being popular as a form of Organisation?
In a partnership firm we know that the number of partners cannot exceed 20. So,
there is a limit to the contribution of capital. Secondly, even if the partners could contribute a
large amount of capital, they would hesitate to do so considering the risk involved in business
and their unlimited liability. Mainly to take care of these two problems, a company form of
business organization came into existence.
A company form of business organization is known as a Joint Stock Company. It is a
voluntary association of persons who generally contribute capital to carry on a particular type
of business, which is established by law and can be dissolved only by law. Persons who
contribute capital become members of the company. This form of business has a legal
existence separate from its members, which means even if its members die, the company
remains in existence. This form of business organizations generally requires huge capital
investment, which is contributed by its members. The total capital of a joint stock company is
called share capital and it is divided into a number of units called shares. Thus, every member
has some shares in the business depending upon the amount of capital contributed by him.
Hence, members are also called shareholders. And the name of the company ends with
Limited (Ltd.) to give an indication to the outsider that they are dealing with limited liability

Features:
• Legal Information:
No single individual or a group of individuals can start a business and call it a joint
stock company. A joint stock company comes into existence only when it has been
registered after completion of all formalities required by the Indian Companies Act,
1956.
• Artificial Person:
Just like an individual, who takes birth, grows, enters into relationships and dies, a
joint stock company takes birth, grows, enters into relationships and dies.
• Common Seal:
Once the contract paper is sealed and signed by any one from the company, it
becomes valid. Even the person may leave the company thereafter or may be
removed from the job or may have taken a wrong decision, yet for all purposes the
contract is valid till a new contract is made or the existing contract expires.
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• Perpetual Existence:
Even if all of the company members die in an accident the company will not be
closed. It will continue to exist. The shares of the company will be transferred to the
legal heirs of the deceased members.
• Limited Liability:
In a joint stock company, the liability of a member is limited to the extent of the
value of shares held by him.
• Ownership & Management:
The shareholder is spread over the length and breadth of the company. So, to
facilitate administration the shareholders elect some among themselves are the
promoters of the company as Directors to a Board, which looks after the
management of the business. The board recruits the managers and employees at
different levels in the management. Thus, the management is separated from the
Owners.
Advantages:
• Large Finance Resources
• Limited Liability
• Professional management
• Large-Scale Production
• Contribution to society
• Research & Development
Disadvantages:
• Difficult to form
• Excessive Government Control
• Delay in policy decisions
• Concentration of economic power & wealth in few hands
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4. Distinguish between sole proprietorship and partnership business
organisations.
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5. Distinguish between Joint Stack Company and Partnership business
organisations.
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6. Describe the need for Public Enterprises in India and also problems existed
with public enterprises.

Traditionally, business activities were left mainly to individual and private organizations, and
the government was taking care of only the essential services such as railways, electricity
supply, postal services etc.
As state earlier, the business units owned, managed and controlled by the central, state or
local government are termed as public sector enterprises or public enterprises.
Features:
• State control:
The public enterprises are owned and managed by the central or state government,
or by the local authority.
• Financed from Govt. funds:
The public enterprises get their capital from Government Funds and the government
has to make provision for their capital in its budget
• Accountability of public services:
They are accountable to the public because they are accountable to the government
which represents the people. Public enterprises are not guided by profit motive.
Their major focus is on providing the service or commodity at reasonable prices.
• Excessive Formalities:
The government rules and regulations force the public enterprises to observe
excessive formalities in their operations. This makes the task of management very
sensitive and cumbersome.
Advantages:
• Social Welfare
• Sufficient Capital since it leaded by Govt.
• Large-Scale productions
• Convertible profits
• Controlled by people
Disadvantages:
• Inefficient management due to lacking of taking quick decisions
• Bureaucracy & Corruption
• Political considerations
• Frequent Transferring of the officials
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Unit – 3: Market Structures, Product Life-Cycle (PLC), Pricing & Financial
Accounting
1. Distinguish between Perfect Competition and Monopoly with its features.

2. Differentiate Monopolistic from Oligopoly competition with its features.

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3. Describe the stages in Product Life Cycle and explain.
• The product life cycle is the process a product goes through from when it is first
introduced into the market until it declines or is removed from the market.
• PLC also forces a continuous scan of the market and allows the company to take
correct action faster.
Stages:
1. Introduction:
• Once a product has been developed, the first stage is its introduction stage.
• During the introduction stage, marketing and promotion are at a high
• Heavy spending period for the company with no guarantee that the product will
pay for itself through sales.
• The principle goals of the introduction stage are to build demand for the product
and get it into the hands of consumers, hoping to later cash in on its growing
popularity.
2. Growth:
• By the growth stage, consumers are already taking to the product & increasingly
buying it.
• The product concept is proven and is becoming more popular- and sales are
increasing.
• As a result of the product growing, the market itself tends to expand.
• The production in the growth stage is typically tweaked to improve functions &
features.
• Marketing in this stage is aimed at increasing the product's market share.
3. Maturity:
• When a product reaches maturity, its sales tend to slow or even stop - signalling a
largely saturated market.
• Marketing at this point is targeted at fending off competition, and companies will
often develop new or altered products to reach different market segments.
• The maturity stage may last a long time or a short time depending on the product.
4. Decline:
• Although companies will generally attempt to keep the product alive in the
maturity stage as long as possible, decline for every product is inevitable.
• The company's product loses more and more market share, and competition tends
to cause sales to deteriorate.
• Eventually, the product will be retired out of the market unless itis able to redesign
itself to remain relevant or in-demand.
4. Explain different Pricing methods.
The Pricing Methods are the ways in which the price of goods and services can be calculated
by considering all the factors such as the product/service, competition, target audience,
product’s life cycle, firm’s vision of expansion, etc. influencing the pricing strategy as a
whole.
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Based on Cost:
1. Cost-Plus Pricing:
Cost-plus pricing is a pricing strategy in which the selling price is determined by
adding a specific mark-up to a product's unit cost.
2. Marginal Cost Pricing:
Practice of setting the price of a product to equal the extra cost of producing an
extra unit of output.
Based on Competition:
1. Sealed-bid Pricing:
Sealed bid pricing is the process of offering to buy or sell products
at prices designated in sealed bids
2. Going rate Pricing:
Going rate pricing is when a business sets the price of their product or service
based on the market price.
Based on Demand:
1. Price Discrimination:
In pure price discrimination, the seller charges each customer the
maximum price he or she will pay.
2. Perceived value Pricing:
perceived value is the customers' evaluation of the merits of a product or
service, and its ability to meet their needs and expectations, especially in
comparison with its peers.
Based on Strategies:
1. Market Skimming:
Price skimming is a pricing strategy in which a marketer sets a relatively high
initial price for a product or service at first, then lowers the price over time. It
allows the firm to recover its sunk costs quickly before competition steps in and
lowers the market price.

2. Market Penetration:
Market penetration is a measure of how much a product or service is being used
by customers compared to the total estimated market for that product or
service.
3. Two-part Pricing:
Two-Part Pricing (also called Two Part Tariff) = a form of pricing in which
consumers are charged both an entry fee (fixed price) and a usage fee (per-
unit price).
4. Block Pricing:
Block pricing is the pricing strategy in which identical products are packaged
together in order to enhance profits by forcing customers to make an all-or-
none decision to purchase.
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5. Commodity Bundling:
selling products together (bundle) Typically at a price that is less than sum of
components.
6. Peak load pricing:
The Peak Load Pricing is the pricing strategy wherein the high price is charged
for the goods and services during times when their demand is at peak
7. Cross subsidization:
Product-cost cross-subsidization is the strategy of pricing a product above its
market value to subsidize the loss of pricing a different product below its market
value.
8. Transfer Pricing:
Transfer pricing refers to the prices of goods and services that are exchanged
between commonly controlled legal entities within an enterprise.

5. Define Accounting process & explain the significance of accounting process.

It is a process to keep a track of business’ financial status. It starts with the process of
bookkeeping and finishes with reporting data and information as a financial statement at the
end of every financial year.
1. Evaluating business performance:
Financial records reflect the company’s financial position. This also leads to
comparing accounts of previous years with that of the current one to keep a track of
business results.

2. Manage and monitor cash flow:

Keep a close watch on the working capital and cash requirements to gauge business’
financial standings. This is only possible if your books of accounts are well-organized.

3. Keeping business compliant:

A company will realise its duties if it records the liabilities with precision. The timely
payment of registrations and payments ensure that it stays compliant.

4. Ease of future projections and budgeting:

The accounting data helps in preparing the budget targeted towards a specific
business strategy. It also helps the company in by providing it with many different
financial reports that are essential for day-to-day business operations.

5. Simplified Filings:
Filing statements with regulators and stock exchanges for tax are simplified with
accounting. Filing formalities are fulfilled with least efforts with ROC and stock
exchange (if a listed company)
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6. Discuss the concept of Double Entry Book-keeping and rules of Journalising
business transactions.
Double-entry Book-keeping system:
Modern accounting system is based on double entry system which is based on the
fundamental accounting equation, Assets = Liabilities + Equity.
• This system believes an assumption of every transaction has two aspects which are to be
considered as incoming aspect and outgoing aspect.
• To identify and balance these two aspects the words ‘Debit’ and ‘Credit’ are created
with the above meanings.
• According to the double entry bookkeeping principle, “Every debit has its corresponding
credit”.
• To meet this principle, it is required to record every transaction twice in the book of
accounts.
Types of Accounts maintained:
1. Personal Accounts:
• Accounts which are transactions with persons are called “Personal
Accounts”.
• A separate account is kept on the name of each person for recording the
benefits received from, or given to the person in the course of dealings with
him.
• E.g.: Krishna’s A/C, Gopal’s A/C, SBI A/C, Nagarjuna Finance Ltd. A/C, Roy &
Sons A/C, HMT Ltd. A/C, Capital A/C, Drawings A/C etc
2. Real Accounts:
• The accounts relating to properties or assets are known as “Real Accounts”.
• Every business need asset such as machinery, furniture etc, for running its
activities.
• A separate account is maintained for each asset owned by the business.
• E.g.: cash A/C, furniture A/C, building A/C, machinery A/C etc.
3. Nominal Accounts:
• Accounts relating to expenses, losses, incomes and gains are known as
“Nominal Accounts”.
• A separate account is maintained for each item of expenses, losses, income
or gain.
• E.g.: Salaries A/C, stationery A/C, wages A/C, postage A/C, commission A/C,
interest A/C, purchases A/C, rent A/C, discount A/C, commission received
A/C, interest received A/C, rent received A/C, discount received A/C.
Rules of Journalising Business Transactions:
1. Personal Accounts:
• The account of the person receiving benefit(receiver) is to be debited
• The account of the person giving the benefit (given) is to be credited.
• Rule: “Debit----The Receiver, Credit---The Giver”
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2. Real Accounts:
• When an asset is coming into the business, account of that asset is to be
debited.
• When an asset is going out of the business, the account of that asset is to be
credited.
• Rule: “Debit----What comes in, Credit---What goes out”
3. Nominal Accounts:
• When an expense is incurred or loss encountered, the account representing the
expense or loss is to be debited.
• When any income is earned or gain made, the account representing the income of
gain is to be credited.
• Rule: “Debit--All expenses & losses, Credit--All incomes & gains”
7. What are financial statements. Explain its types & mention its users & purpose
of their usage?
Financial statements are written records that convey the business activities and
the financial performance of a company.
Types of Financial Statements:
1. Income Statement:
The basic format for an income statement states revenues first, followed by
expenses. The expenses are subtracted from the revenue to calculate the
net income of the business.
2. Balance Sheet:
The balance sheet shows the assets, liabilities and shareholders' equity of
the business. The total assets must equal the summation of the total
liabilities and shareholders' equity.
3. Cash Flow Statement:
A cash flow statement shows the actual flow of cash in and out of the
business.
Users of Financial Statements:
1. Owners & Investors:
Prospective investors need information to assess the company's potential for
success and profitability. In the same way, small business owners need
financial information to determine if the business is profitable and whether
to continue, improve or drop it.
2. Management:
For analysing the business activities & taking quick decisions for further
expansions.
3. Lenders:
Lenders of funds such as banks and other financial institutions are interested
in the company’s ability to pay liabilities upon maturity
4. Trade creditors or suppliers:
Like lenders, trade creditors or suppliers are interested in the company’s
ability to pay obligations when they become due.
5. Government: for taxation and regulatory purposes.
 Engineering Economics & Accountancy
6. Employees:
Employees are interested in the company’s profitability and stability. They
are after the ability of the company to pay salaries and provide employee
benefits.
7. Customers:
When there is a long-term involvement or contract between the company
and its customers, the customers become interested in the company’s ability
to continue its existence and maintain stability of operations.
8. General public:
Anyone outside the company such as researchers, students, analysts and
others are interested in the financial statements of a company for some valid
reason.
Purpose of Financial Statements:
Financial statements are important because they contain significant information
about a company’s financial health. Financial statements help companies make
informed decisions since they highlight which areas of the company provide the best
ROI (return on investment).
8. Problems on Journalising, preparing ledger book, trial balance & final accounts.
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Journalising:
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Posting it into Ledger Book:
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Preparing the Trial Balance:

Preparing Final Accounts:

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Unit – 4: Financial Analysis Through Ratios
1. Explain the significance of Ratio Analysis in Financial Decision making.
1) Analysis of Financial Statements:
Interpretation of the financial statements and data is essential for all internal and
external stakeholders of the firm.
2) Helps in understanding the profitability of the company:
Helps to understand the ability of the firm to generate earnings.
3) Analysis of operational Efficiency of the firms:
Certain ratios help us to analyse the degree of efficiency of the firms.
4) Liquidity of firms:
Liquidity determines whether the company can pay its short-term obligations or not.
5) Helps in Identifying the Business risks of the firm:
Calculating the leverages (Financial Leverage and Operating Leverages) helps the
firm understand the business risk
6) Helps in Identifying the financial risks of the company:
Help the firm understand how it is dependent on external capital and whether they
are capable of repaying the debt using their capital.
7) For planning & future forecasting of the firm:
used for critical decision making by external stakeholders like the investors. They can
analyse whether they should invest in a project or not.
8) To compare the performance of the firms:
The ratios can also be compared to the firm’s previous ratio and will help to analyse
whether progress has been made by the company.
2. Explain Ratios.
1. Liquidity Ratios:
This ratio reflects whether an individual or business can pay off the short-term
dues without any external financial assistance.
• Current Ratios:
Current ratio implies the financial capacity of a company to clear off
the current obligations by using its current assets.
Formula: Current Ratios / Current Liabilities
• Quick Ratios:
Quick ratio or acid test ratio is another liquidity ratio that
determines a company’s current available liquidity.
Formula: (Current Assets – Inventory) / Current Liabilities
2. Solvency Ratios:
The solvency ratio indicates whether a company's cash flow is sufficient to meet its
short-and long-term liabilities.
• Debt-Equity Ratios:
This ratio helps understand if the shareholder’s equity has the ability
to cover all the debts in case business is experiencing a rough time.
Formula: Total Liabilities / Shareholder’s equity
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• Interest Coverage Ratios:
The interest coverage ratio is used to determine whether the
company is able to pay interest on the outstanding debt obligations.
Formula: Earnings before interest, taxes / Interest on long term debt
• Total Debt Ratios:
Debt ratio is a financial ratio that is used in measuring a company’s
financial leverage.
Formula: Long-Term Debt / Total Assets
3. Activity/Turn-Over Ratios:
An activity ratio is a type of financial metric that indicates how efficiently a company
is leveraging the assets on its balance sheet, to generate revenues and cash.
• Inventory Turn-Over Ratios:
Inventory turnover indicates the rate at which a company sells and
replaces its stock of goods during a particular period.
Formula: Cost of Goods Sold / Average Inventory
• Fixed Assets Turn-over Ratios:
The fixed asset turnover ratio is an efficiency ratio that measures how
well a company uses its fixed assets to generate sales.
Formula: Net sales / Average fixed assets
• Working Capital Turn-over Ratios:
It signifies that how well a company is generating its sales with
respect to the working capital of the company.
Formula: Sales / Working Capital
• Debtors Turn-over Ratios:
This ratio indicates the degree of management of debtors or sales.
Formula: Total Sales / Debtors
4. Profitability Ratios:
Profitability ratios show how efficiently a company generates profit and value for
shareholders.
• Gross Profit Ratio:
It is a profitability ratio that shows the relationship between gross
profit and total net sales revenue.
Formula: Gross Product / Net Sales
• Net Profit Ratio:
Relationship between net profit after tax and net sales.
Formula: Net Profit after tax / Net Sales
• Earnings Per Share Ratio:
The EPS formula indicates a company’s ability to produce net profits
for common shareholders.
Formula: (Net Income – Preferred Dividends) / End period shares
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Unit – 5: Management Accounting
1. Explain the nature and objectives of Management Accounting.
Management accounting may simply define as tools and techniques that provides accounting
information to carryout management activities such as planning, controlling, evaluating and
decision making.
Nature:
1) To provide Accounting Information:
Information is collected and classified by the financial accounting department and
presented in a way that suits managerial needs to review the various policy decisions
of an organization.
2) Cause & Effect Analysis:
It works to find out the causes for loss and also study the factors which influence the
profitability.
3) Decision Making:
Studying various alternative decisions, studying impact of financial data on future,
supplying useful data to management, helping management to take decisions is a
part of management accounting.
4) Increasing Efficiency:
While evaluating the performance of each department of an organization,
management accounting can spot the efficient and inefficient sections of an
organization.
5) Forecasting:
Management accountant helps management in future planning and forecasting
using historical accounting data.
Objectives:
• Decision Making
• Planning
• Controlling business operations
• Organizing
• Understanding financial data
• Identifying business problem areas
• Strategic Management
2. Explain the features and purpose of fixed capital and working capital.
Fixed Capital:
Fixed capital assets are usually illiquid items and are depreciated over time.
• Buying of fixed assets always required huge investment
• Fixed capital is long lasting in nature
• Any fixed assets are difficult to liquidate because of huge amount and long process
• Fixed assets are always act as security providers for business in critical situations.
• The assets purchased with fixed capital are required human expertise for continuous
maintenance.
• Some fixed assets like land, buildings, fixed deposits gains interest and increased market
price which increase the overall value of the business.
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• Depreciation of some percentage is required to calculate for some of the sunk assts like
machinery, furniture, buildings because of the coverage of usage value reduction and to buy
or replace.
Working Capital:
Working capital is the amount of cash a business can safely spend.
• Cash discount
• Security & Confidence
• Credit Worthiness
• Continuous Supply of Raw Materials
• Exploitation of business opportunities
• Increase in Productivity
• Meeting exigencies
3. Explain the various methods of raising long-term and short-term Finance for
the business.
Long-Term Finance:
• Equity Financing:
Equity finance is a method of raising fresh capital by selling shares of the
company to public, institutional investors, or financial institutions.
• Corporate Bond:
A corporate bond is a type of debt security that is issued by a firm and sold to
investors.
• Capital Notes:
A capital note is short-term unsecured debt generally issued by a company to
pay short-term liabilities
Short-Term Finance:
• Commercial Paper:
Commercial paper is a commonly used type of unsecured, short-term debt
instrument issued by corporations, typically used for the financing of payroll,
accounts payable and inventories, and meeting other short-term liabilities.
• Promissory Notes:
A signed document containing a written promise to pay a stated sum to a
specified person or the bearer at a specified date or on demand.
• Asset Based Loan:
Asset-based lending is the business of loaning money in an agreement that is
secured by collateral.
• Repurchase Agreements:
A contract in which the vendor of a security agrees to repurchase it from the
buyer at an agreed price.
• Letter of Credit:
A letter issued by a bank to another bank (especially one in a different
country) to serve as a guarantee for payments made to a specified person
under specified conditions.
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Unit – 6: Cost Accounting
1. Write a brief note on important types of costs and their nature.
The analysis of cost is important in the study of managerial economics because it provides a
basis for two important decisions made by managers:
(a) Whether to produce or not?
(b) How much to produce when a decision is taken to produce?
Types & Nature of Costs:
• Opportunity Cost:
When an option is chosen from alternatives, the opportunity cost is the "cost"
incurred by not enjoying the benefit associated with the best alternative
choice.
Ex: A student spends three hours and $20 at the movies the night before an
exam. The opportunity cost is time spent studying and that money to spend
on something else.
• Explicit/Out-of-Pocket Cost:
Explicit costs are normal business costs that appear in the general ledger and
directly affect a company's profitability.
Ex: Wages
• Implicit/Imputed Cost:
An implicit cost is any cost that has already occurred but not necessarily
shown or reported as a separate expense.
Ex: Time spent developing the new private practice
• Fixed Cost:
A fixed cost is a cost that does not change with an increase or decrease in the
amount of goods or services.
Ex: Salaries, Taxes
• Variable Cost:
A variable cost is an expense that rises or falls in direct proportion to
production volume.
Ex: Cost of Raw materials
• Semi-Variable Cost:
Costs are fixed for a set level of production or consumption, and become
variable after this production level is exceeded.
Ex: Commission Payments
• Differential Cost:
Differential cost refers to the difference between the cost of two alternative
decisions.
Ex: If you have a decision to run a fully automated operation that produces
100,000 widgets per year at a cost of $1,200,000, or of using direct labour to
manually produce the same number of widgets for $1,400,000, then the
differential cost between the two alternatives is $200,000.
• Sunk Cost:
A sunk cost refers to money that has already been spent and which cannot be
recovered.
Ex: Money spent on new equipment
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• Total Cost:
sum of all consistent, non-variable expenses a company must pay.
Ex: suppose a company leases office space for $10,000 per month, rents
machinery for $5,000 per month, and has a $1,000 monthly utility bill. In this
case, the company's total fixed costs would be $16,000.
• Average Cost:
Average cost or unit cost is equal to total cost (TC) divided by the number of
units of a good produced.
Ex: The weighted-average cost is the total inventory purchased in the quarter,
$113,300, divided by the total inventory count from the quarter, 100, for an
average of $1,133 per unit.
• Marginal Cost:
The marginal cost is the cost of producing one more unit of a good.
Ex: If a company needs to build a new factory in order to produce more goods,
the cost of building the factory is a marginal cost.
2. Explain the utility of Break-even Analysis in managerial decision making with
assumptions & limitations.
• Break – even analysis is a specific method of presenting and studying the inter
relationship between costs, volume and profits.
• It is also known as cost- volume- profit analysis (CV-P Analysis).
• Break- even point is a point of no profit or no loss.
• At this point contribution is equal to fixed costs.
• Breakeven point can be calculated in units or sales.
• At break- even point the desired profit will be zero.
Reason for utility:
• The Break- Even analysis technique (which is one of marginal casting technique) helps
management in taking appropriate decisions regarding the product mix,
i.e. in changing the ratio of product mix so as to maximize profits.
• This technique not only helps in dropping un-profitable products from the mix but
also helps in dropping unprofitable departments, activities etc.,
Assumptions:
• Total cost can exactly be categorized in to fixed costs and variable cost, means, no
existence of semi- variable costs.
• No change in selling price, variable costs, it means, the firm is not going to offer either
cash or price discounts to its customers. Selling price remains constant.
• It is used for short- term purpose.
• All the produced goods are completely sold means, no unsold goods.
Limitations:
• Difficulty in segregation of costs:
It is very difficult to segregate total costs into fixed & variable components.
• Complicated Calculations:
A lot of complicated calculation are involved.
• Limited Importance:
At best it would
help management to indulge in cost reduction in times of dull business.
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• Limited application in long-range planning:
It is a short-term concept, and it has a limited application in the long- range
planning.
Important Formulae: