FELM4026 Financial and Economic Interpret Financial Information

Answer 1.

(a) Business organization refers to a group of individuals who comes up together so as to form a business with the objective of earning profits and fulfilling their organizational as well as individual goals. Business organization comes under the broad heading 'market'. Business organizations have no existence if there is no market in the country (Spiceland, Thomas and Herrmann, n.d.). Basically, the structure of the market includes a wide range of influencing factors such as the pricing technique, cost methods followed by different firms in the same Industry, market share of large firms in the industry, number of firms, number of buyers and sellers in the market, turnover of customer towards the market, demand supply forces, etc.

Globalization refers to expanding the business on an international scale and developing an international power & image. Apple Inc is one such global American company that develops consumer electronics and personal computers and operates worldwide. It is engaged in the designing of Macs laptop along with OS X, iwork, iCloud etc and indulges in a wide range of professional services, accessories and software’s. Apple Inc produces its products using a number of differentiation strategies so as to enhance its international image. Its main purpose is to provide high customer value through its innovative brands (Shirur, 2016).

As per the given case, Apple Inc. has recently introduced iPad 2 in the market which will be defining the future of technology world. Apple focuses on providing the highly valued technology so as to develop the customer technology. As we all know, Apple doesn't come up with a wide range of products in the same product arena. It does a lot of in depth research work focusing on extending the functions of its existing products rather than coming up with a variety of same products with slight differences. Apple is a creative corporation and not a production company. Although Apple earns huge profits, its main focus is to live upto the customers lives and maintain its image of being one of the most popular and strong competitor in the market. No other competitive firm in the field of mobile technology can survive in the market with just one product like Apple does. Apple, before launching a product, targets for becoming the 'leader' in that particular product area. Thus, Apple aims at providing its customers with a remarkable experience and that is why, it focuses more on improving the quality of its existing products and coming up with new innovations and features in terms of hardware and software (Samuelson et al., 2010).

Globalization doesn't mean providing the products to several international markets. It takes a lot to enter into a global market. Apple Inc. being a global company focuses more on establishing a global brand with a strong identity. Apple Inc has been well known for opting the perfect business strategy in the market like it chooses only those countries where its business would successfully grow. Apple products are way much differentiable from other products and that is why, customer’s desires for it to maintain their high valued reputation. The more differentiable the Apple products are or the more professional look they carry, the more customers are attracted towards it. Due to its strong image and customer loyalty, Apple always focuses on launching less but strong products with enough value additions that it only helps Apple to grow globally.

(b) Macroeconomics is the branch of economics that deals with the entire economy as a whole and includes the study of behaviour and analysis of performance of the country's economy. It generally includes the factors such as unemployment, inflation, fiscal changes, growth rate, domestic production, national and international financial policies,etc. Where microeconomics includes the factors affecting a single firm in the industry, macroeconomics analyzes the aggregate influence of the factors affecting the entire economy as a whole (Salvatore, 1991). Macroeconomics helps the government and the business enterprises to formulate the appropriate economic strategies so as to contribute towards the development of the country (Warren, Duchac and Reeve, n.d.).

The total demand for goods and services in an economy is referred to as 'aggregate demand'  while the total supply in the economy is termed as aggregate supply (Piper, 2015). Aggregate demand is usually determined by the summation of customer demand, investment usage, government expenditure and the net exports. The aggregate demand's graph shows a downward sloping line indicating an inverse relationship, that is, demand falls down when price increases.

On the other hand, the total amount of goods and services that are produced in an economy at a given price level is referred to as' aggregate supply'. Full production is obtained only by using the resources in the most efficient way and at its maximum assuming that there is full employment and full resource utilization (OFFICIAL GUIDE TO FINANCIAL ACCOUNTING USING TALLY, 2017).

Increase/decrease in demand takes place due to number of factors such as increase/decrease in wealth, decrease/increase in interest rates, increase/decrease in expected inflation, higher or lower income abroad, etc. Also, when the consumers feels better about the economy in terms of their job satisfaction, they spend more leading to increase in optimisation that leads to increase in demand. On the other hand, increase/decrease in supply takes place due to number of factors like increase/decrease in resources utilization, technology improvements, favourable supply shocks, etc. Ultimately, the increase in supply takes place due to proper resources utilization, proper prices of resources, and use of it in the most effective and efficient manner.

Now comes into the picture the concept of Elasticity which defines the relationship between demand and supply and their reaction towards the changes in prices. The elasticity % equals to the % change in price to the % change in quantity (Mohun, 2012). This means that the goods that are highly elastic shows significant changes in demand and supply curves with even small changes in the prices. Elasticity can be affected by a number of factors like the substitutes available in the market, the amount of income available in the hands of the nation as a whole, and time. Elasticity plays a key role in determining the changes in business revenue structure due to price changes, analysis of spending on advertisement, tax burden, etc.

The current fuel report states that the unleaded prices have fallen down by 2.4p while the prices of diesel have fallen down by 3.1p. Basically, petrol and diesel are considered to be 'Substitute Goods' as the increase in price of one leads to increase in demand of the other. However, the fall in the prices has major impact on the growth and inflation of the country. It has direct impact on the prices and activity of both oil importers and exporters and indirect effects on the trade and commodity markets, policy responses, investment uncertainties, etc (Loughran, 2011)

However, the fall in crude prices is very much beneficial for the importing country like India as it has 70-80% import oil dependency. India's GDP touched $2 trillion in 2015 which is considered to be its highest achievement so far. Due to falling of oil prices, India's macroeconomic factors such as inflation, current account deficit (CAD), and trade balances shows high improvement. The CAD came down to $22.1 billion from $26.8 billion which means from 1.3 per  cent of GDP to 1.1 per cent of GDP. This changes helps the government to manage its finances better as it helps in lower subsidies on petroleum products such as kerosene and LPG and thereby, resulting in lower fiscal deficit (Weygandt, Kieso and Kimmel, n.d.).

The consumption of crude oil in India has been continuously increasing since 2000. However, a sharp decline has been observed in the prices since 2014 (Libby, Libby and Hodge, 2017).

(c)  National Competition Policy has been made by thr Government of India with a view of achieving high levels of sustainability of economic growth, development in entrepreneurships, generation of employment, equal protecting rights for the consumers, higher standards of living of the citizens, economic democracy, sustainable economic and social development and proper governance  strict law &  order in the country. The main objective of this policy is to create a single national market and promote consumer wealth (Kimmel, Weygandt and Kieso, n.d.).

Considering the Chinese economy, the labour force over there is peaking leading to increased wage cost. There is an on going international pressure on the government to appreciate the yuan even further. These situations have have led the Chinese economy to accept a lower growth target as well as to begin to move up its economy. The changes in Chinese economy opens up a wide opportunities for India to move itself in the low cost workshops of the world, that leads to the generation of millions of jobs that will allow people to switch to something better from the overcrowded farming sector.

However, this process cannot be executed automatically. India needs huge investment in infrastructure, skills &  energy and more efficiency in the factors of production market such as capital &  labour. The new budget needs to be understood against the wider drawbacks.

Supply side policies are the attempts by the government to increase productivity so as to shift the aggregate supply curve to the right. Supply side policies leads to lower inflation rate and can contribute towards the reduction in the structural, frictional and real wage unemployment leading to reduction in unemployment rate. Fiscal polices deals with the taxation and expenditure structure of the government. Fiscal policies aims at raising the rate of savings and investments, to promote private sectors development, optimum utilization of resources and increasing economic stability, remove poverty &  unemployment ,etc (Izhar and Hontoir, 2001).

In India, there is a wide gap between the government expenditure and revenue which is now successfully is being reduced by increasing revenue through taxation procedures rather than cutting its spending. There is a lot of procedures regarding the revision of taxes such as wealth tax, special taxes for rich society, tax on personal tax held outside the nation, etc and the other way adopted is moving ahead with overdue taxes, that is through direct taxes & goods and services tax (GST). The government is also structuring its spending as well for example, it is targeting the fuel subsidies that usually targets the middle class and farmers.

India can neither create enough jobs nor can it fund an ambitious welfare state if it doesn't face a faster growth in economy (Ittelson, 2009). A lot of corrections are to be made like a fiscal correction would increase the national savings and investment activity will be boosted up. This will gradually shift the aggregate supply curve to the right.

According to World Bank report, 67 million Indians were pulled above the international poverty line of $1.25 per day. The reduction in rate of poverty is no coincidence between 2005 and 2010,when the economic growth averaged 8.6%. India has a lot of potential to raise its economic growth. Though all the parts of the economy is growing yet a lot of corrections and reforms are to be made to actually utilize the amount in the best possible manner for the welfare of the nation (Harrison, Horngren and Thomas, 2015).

Answer 2.

A company requires resources in order to run smoothly and efficiently. Capital which is required the blood of every company is the primary requirement to run an organisation.  The company needs to make estimation about the funds required; this process is known as financial planning.  It provides the basic idea about the procurement of funds from various sources and the places where it should be invested. Financial planning helps to determine the capital structure and also helps in ascertaining the capital requirement of the company. In order to survive in the long run the company must maintain a balance between the cash outflows and the inflows (Grant, n.d.).

A company has to raise funds through various sources in order to fulfil its capital requirements. The company may raise funds through debt and equity. However, there are various factors that is taken into consideration while taking such decisions. Generally, a company avoids taking huge debt because there lies an obligation to pay interest as well as the principal (BRIGGS, 2015). A company with huge debt is not considered healthy and therefore there are very few investors who are ready to invest in such companies. Equity does not have any such obligation of paying interest. However, the company pays dividend to the shareholders when it earns sufficient profits. In case of equity, there is no burden of repayment or the dividend. The information about the debt and equity of a company is clearly reflected in its financial statement. Financial statement provides a true and fair view of the company’s financial position and its capital structure(Bamford and Grant, 2015).

For example- If there is a company whose debt equity ratio is high i.e. if the debt is considerably higher than the equity then it is not good. Similarly, if the assets o the company are not sufficient to pay off these debts then the company I at great risk and it may not survive in the long run. The going concern of such company is questionable.

A company raise funds in order to invest it in the current as well as certain non-current assets.  But before making any type of investments in such assets it should analyse and see whether it is worth investing in such asset or not. It helps in evaluating the future benefits that it may give to the company and determine the extent of time it would provide those benefits.  As we have already discussed, there should be balance between the cash inflows and cash outflows. These cash outflows should help in earning higher returns (Atrill and McLaney, 2009).

Apart from planning the finances, financial control is also very important in order to determine whether the company is able to meet with its targets or not. Financial control can be defined as an analysis of the actual results in comparison to the various short term, medium term and long term objectives that has been set by the company. This helps to ascertain the progress of the company. It also helps to determine the areas where there is a scope of improvement and also take necessary preventive measures as and when required. This not only helps the employees to evaluate their own performance but also motivates them to achieve goals in the future.  

Answer 3.

1. The financial ratios are calculated below:

Current ratio means whether the assets are able to pay off the current liabilities or not. Higher the ratio better it is. Therefore, we can say that the current ratio which has gone down from 0.73 to 0.60 is not considered good. It shows that the ability to py off these liabilities is going down.

Gross profit shows the profit earned as a relation to the sales. Therefore, The higher is the percentage of profit, the better it is. The negative value reflects the poor performance of the company which has resulted in losses.

Debt is considered as a risky element. So, a large proportion of debt in the capital structure is not considered good. Therefore, the ratio show should be lower. However, it has been observed that the amount of debt is increasing which is bringing the company to a risky stage.

The turnover should always keep on growing over the years. The fixed asset turnover ratio shows the sales by using the fixed assets of the company.

The PE ratio is considered good when it is high because this helps the shareholders to earn huge returns. The expectation of the shareholder is fulfilled with the increase in the PE ratio.

b.

c.

Therefore, Project A should be accepted, since the net present value from project A is higher than that of project B.

References:

Atrill, P. and McLaney, E. (2009). Management accounting for decision makers. Harlow: Financial Times/Prentice Hall.

Bamford, C. and Grant, S. (2015). Cambridge international AS and A level economics coursebook. Cambridge: Cambridge University Press.

BRIGGS, M. (2015). TEXT-BOOK OF ECONOMICS (CLASSIC REPRINT). [S.l.]: FORGOTTEN BOOKS.

Grant, S. (n.d.). Cambridge IGCSE economics.

Harrison, W., Horngren, C. and Thomas, C. (2015). Financial accounting. Boston: Pearson.

Harrison, W., Horngren, C. and Thomas, C. (n.d.). Financial accounting.

Ittelson, T. (2009). Financial Statements: A Step-by-step Guide to Understanding and Creating Financial Reports. Career Press.

Izhar, R. and Hontoir, J. (2001). Accounting, costing and management. Oxford: Oxford University Press.

Kimmel, P., Weygandt, J. and Kieso, D. (n.d.). Financial accounting.

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