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FELM4026 Financial and Economic Literacy for Managers

Questions:

1. Explain the principles of business and financial economics in an international context.
2. Identify and explain the impact of governmental, monetary and economic policy on decision making in a business context.
3. Describe and apply macro and micro concepts and models to business decision making.
4. Interpret financial information (external and internal) and apply to decision making within a business context.
5. Discuss the rationale and impact of decisions for business strategies to users and stakeholders.
6. Examine and discuss the relationship between theory, and application in business and financial economics in an international context.

Answer:

Introduction

Globalisation simply means that corporations have global presence. In the recent era, the scope of concept of globalisation has become wide due to the advancement of technology that has allowed the organisations to touch the boundaries of international economy. In economic terms, the term globalisation implies to the enhanced economic integration across the world due to major components of nation’s economy such as its trade, investments and funds are increasingly crossing the global borders.  

Impact of globalisation on the economies

The effect of globalisation can be seen on various areas such as financial market interdependence, enhanced role of multinational companies, technology transfers from one to another country, greater interdependence of various fiscal or regulatory policies and increased dependence of national markets on the international trade. Because of the rapid development of technologies, mobility of labour force, goods, services, finance and capital across the world has become quite convenient and cost effective. Also, the level of communication in the global world has improved significantly because of introduction of different means of communication. Technological progress has also resulted in drastic decline in the cost of communication of information from one country to another country (Gereffi, et. al., 2001). All these factors have made it easy for the large companies to grow and expand the business without considering their geographical limits.

Rise of Multinational corporations because of Globalisation 

The multinational corporations of the countries help in nurturing the growth and prosperity their respective economies by generating foreign exchange through the export of their products and services. The foreign exchange that is generated by the MNCs of a country enables it to enter into trade deals in the potential international market where payments are required to made in the local currency of such countries (Ionescu, & Dumitru, 2011).  

The economies of UK and US have been the strongest economies across the world but after the recession even these economies had to face severe repercussions. Local corporations are rapidly going global by the ways of setting up of plants in the overseas markets in order to take advantage of the cost effective labour resources and to get closer to the markets where the dem


and of their products is higher (Landefeld, 2003). It is generally observed in many surveys that the labour cost of UK is comparatively higher than that of other companies. Due to this, the UK firms that are engaged in the business of manufacturing of consumer products or other goods under which high component of labour cost is involved are unable to compete with other manufacturing concerns of other countries (Stearns, 2016).

Real world examples of companies that have adopted the concept of globalisation

  • Most recently Apple Inc. has become a virtual firm which has outsourced its significant portion of production work to the other counties such as Asia.
  • Another example of multinational corporations is the case of Toyota Motor Corps., which is a Japanese company. Toyota is shipping is car parts manufactured in Japan to US for their final assembly because of availability of high-class technology and human intelligence factors in the US economy. Only around 1/3rdof the total operations of the business are carried in japan and almost 2/3rd of the business operations of Toyota cars are carried in different counties (Schifferes, 2007).
Conclusion

Globalisation has therefore allowed the companies to expand their business to the international markets so that the customer base of those companies could be enhanced. Besides this, it has become easy for the countries to take advantage of the technologies that are developed by the different countries to enhance their productivity. The concept of globalisation is that it has positively contributed to the strengthening of economies of different countries through various modes. 

Introduction

Economic growth of the country means raising the income of the citizens of that particular country and thereby reducing the problem of poverty in such countries. In order to instil the growth in the economy UK government has designed various policies at the macroeconomic level. To promote the economic growth, government is focused on increasing the aggregate demand and supply. For this purpose it has formulated various demand policies and supply side policies.

Demand Sided Policies:

Demand side policies are those policies that are designed with the intention of enhancing the aggregate demand in the economy. It mainly covers fiscal policies and monetary policies. If the corporations have ideal capacity, demand side policies can enable them to increase the economic growth rate.

Monetary policy 

Monetary policies are one of the key tools to stabilize the country’s economy. To enhance the overall demand in the market, governmental regulators or the banking institutions can cut down the interest rates prevailing in the economy. Though, it is not possible that reduced interest rates can always boost up the spending pattern of the country’s people. The UK’s monetary policy is regulated by Bank of England. This bank has given the authority to set the interest rates in the country. During the period 2009-2017, after the huge financial crisis of 2008, setting the lower rates in the economy was insufficient to reinstate the economic growth in the economy hence Bank of England had to pursue the policy of quantitative easing which involved enhanced money supply and buying of government bonds. In year 2009, the base interest rates were cut down by the government to 0.5% with the motive of stimulating the economic growth in the country. During the period of 2009-2012, after the financial crisis, there was no immediate risk of house bubble and hence the policy of government to keep the interest rates at the zero level proved to be appropriate.

Fiscal policy

Fiscal policies are intended to increase the disposal income of the country. UK government had initiated at expansionary fiscal policy for the country to compensate for the decline in the spending of its private sector. Formulation and implementation of fiscal policies by the UK government has boosted the demand of the products and services dealt in the UK market by cutting down the tax rates and also by enhancing the government spending. In year 2009, the UK government had introduced an expansionary fiscal policy in the country to respond to the severe impacts of the economic recession when GDP of the country fell down to 6% and also VAT rate was cut down from 20% to increase the customer spending in 2009 (Allen, 2016). This ultimately caused increase in borrowing by 10% of GDP of the country. This was the key driver of economic growth of UK. Also, the government of UK has targeted to cut down the corporation tax rate below 15%.  Government in UK realised that in 2010 that the deficit is too high and hence they announced various plans to reduce the government borrowings. The UK Government has also targeted to the inflation rate at 2% for the country’s consumer price index (CPI) (Pettinger, 2017).  

Supply Side Policies:

Infrastructural development

To attain the sustainable economic growth of the nation’s economy, UK regulators have committed to invest around £ 100 billion towards the country’s infrastructural development at the Spending Round 2013. The National Infrastructure Plan, 2014 had a clear vision for the infrastructural development in UK. It included bring of delivery plans in the key sectors of the economy by 2020. The intended sectors were transportation, energy, communications, science and waste management. Government had also increased its spending in the science and technological development projects by £ 1.40 billion above the overall amount that was committed by them at Spending Review, 2010. The access to funds by the UK businesses has also been enhanced by the government in last few years (UK Government, 2015).

Cutting Corporation Tax:   

Cutting down of corporate tax rates was also a major action by UK government to promote economic growth from 28% to 23% in 2010 and thereafter, 20% in 2015. This has supported the UK businesses to grow and invest more (UK Government, 2015).

Conclusion

Therefore, it can be said government played major role in reinstate the economic growth in the country after the great recession event. 

Market Structures:

The structure of market depends upon the availability of number of sellers and buyers for the products that are dealt in that particular market. Basically there are 4 types of market structures. They are:

  • Perfect Competition: It is that type of market where huge number of minor firms competes with each other. Therefore, no single firm can significantly influence the market. For example: Stock market.
  • Imperfect Competition: In this type of markets also there is the presence of number of small firms that are competing with other but all of them sell similar but little differentiated products. For example: Market of cereals such as some firms deals in Cap’n Crunch, some in Lucky Charms, some in Apple Jacks  and so on. All these brands tastes slightly different but are used as the breakfast purpose only.
  • Oligopoly: These markets are dominated by little number of firms and hence there is low competition. An example of oligopolistic market is the gaming consoles market which is majorly dominated by 3 corporations: Microsoft, Sony, and Nintendo.
  • Monopoly: This type of the market is unique in nature because of presence of only single firm to control the whole market. The customers of these markets have restricted choices and there is negligible competition in these markets. Example of monopolistic firm is Microsoft Inc.

Concept of Demand in Market 

The term demand is used to refer the quantum of goods and services that the consumers in the market are willing and capable to buy at a given price. The demand of anything in the market depends upon the needs and wants of a person. There is generally an inverse relationship between the price and the demand of the goods and services. Almost every time, when the price of a product increases, the demand of such product decreases (Bouchaud, Farmer, Lillo, 2008). Also, the decrease in price of the product leads to the increase in the demand. This inverse relation is termed as law of demand by the economists.

 Taking the example of a business under which gasoline is supplied. Whenever, the price per gallon of gasoline increases, the people tends to look for the ways to lower their consumption of gasoline product either by choosing the places for the shopping purpose, where they can find maximum things needed by them under the same roof or by using the carpool or other public conveyances or by reducing their vacation trips etc. Graphical representation of this hypothetical case is shown below.

Price per gallon

Quantity (gallons) Demanded (in millions)

 

 

 £                             1.00

800

 £                             1.20

700

 £                             1.40

600

 £                             1.60

550

 £                             1.80

500

 £                             2.00

460

 £                             2.20

420

Concept of Supply in Market

The term supply is used to refer the quantum of goods and services that the suppliers in the market are willing to sell at a given price. There is a direct relationship between the price and the supply of the goods and services. Almost every time, when the price of a product increases, the suppliers are willing to sell more units because it offers them more profitability and hence the supply increases in the market of that product or service (Delgado, 2003). Also, the decrease in price of the product causes decrease in the supply of that product or service because of the fact that suppliers are not willing to sell their goods or services at a lower price since it is not profitable to them. The direct relation between the supply and price of goods or services is termed as law of supply by the economists (Principles of Economies, 2018).

For example: Whenever the price of gasoline product increases, it encourages the firms that are seeking high profitability to take-up certain actions such as expansion of oil exploration for the oil reserves, enhanced drilling to extract more oil, more investment in the oil pipelines as well as tankers that transports the gasoline product at the gas stations, building of new oil refineries, opening up of gas stations for longer hours so that more and more customers could be entertained.

Price per gallon

Quantity (gallons) Supplied (in millions)

 

 

 £                             1.00

500

 £                             1.20

550

 £                             1.40

600

 £                             1.60

640

 £                             1.80

680

 £                             2.00

700

 £                             2.20

720

Management Accounting Costs Concepts

Introduction 

Management accounting is the process of collecting, recording, analysing and interpreting the information that is used by the management of the entity to undertake informed decision regarding the entity’s business. Cost accounting is the key process of management accounting that involves determination of cost of the products and services produced by an entity. The identification of true cost is necessary to set the prices of the products or services on the basis of which they can be sold in the market. If correct pricing decisions are undertaken a firm will not be able to achieve reasonable profitability from its business.

Use of costing concepts and budgeting techniques by managers

Various costing concepts are often used by the managers in the course of their business to record and account for the data related to the significant transactions carried as a part of business.  The costing concepts help in classification and assignment of cost to the different products and services on the appropriate basis using the advanced cost management techniques and methods (Hansen, Mowen & Guan, 2007). At times companies are typically involved in the production of homogeneous products, it is difficult for them to trace out the true cost of each of their product. For example, a firm is involved in manufacturing of paints, bricks and lumbers used in the building construction. Since such products are manufactured in the continuous processes under which cost is pooled together and the final output is measured in the total quantities. Under such circumstances it is hard to attach specific costs to each bucket of paint or a stack of bricks or a piece of lumber produced by the managers.

Also, there are certain organisations that need proper understanding of cost involved in their functions to provide the core services of the business in order to undertake proper billings for their clients. Taking an example of an architectural firm that is involved in the business of designing home. The activities that are involved in its business are complex in nature. Due to the fact that an architecture has to take up multiple projects in a day and such projects involve multiple activities such as training staff, developing clients, billing and collections, designing and printing plans, visiting job sites and consultation of problems encountered during the construction process, it gets difficult for the firm to identify how much exact cost is incurred to set a blueprint for a particular client. In such cases application of relevant costing concept helps the managers to determine the accurate cost associated with their services. The two major concepts of costing are: absorption costing and direct costing (Drury, 2013). Under absorption costing, full cost including the amounts that are not easily identifiable to a particular product, is assigned. But managers must understand that excessive reliance on the absorption costing concepts can lead them to the bad decisions. Therefore, they must apply direct costing concepts where only direct cost of production is applied to the output unit (Zimmerman & Yahya-Zade, 2011).

Further, management accounting can be used to undertake proper planning of the business using the budgeting and forecasting techniques.  Budgeting is an integral part of business planning process as it involves preparation of budgets regarding important aspects of the business for the prescribed period. Budgets are those statements covers the estimated incomes and costs involved in certain transactions in which context budgeting is undertaken. Therefore, a cost management has to prepare different types of budgets such as production budget, purchase budget, sales budget, cash budget and so on (Inman, 2014). Budgeting process is usually carried before the commencement of period to which such budgets are related so that it can enable the managers to undertake the transactions in accordance with the plans so that effective utilisation of resources can be made to achieve the desired results.

Conclusion

Thus, it can be said that the application of requisite management accounting cost concepts and budgeting approaches can enable the managers of the business to undertake effective decision-making. 

Amortisation Schedule

Loan Amount

 £              50,000.00

Rate of interest

7%

Loan Term

3 years

 

 

Year 1

0.935

Year 2

0.873

Year 3

0.816

Cumulative discounting factor

2.624

Loan Amount=

Instalment amount * PVAF @ 7%

 

 

Instalment amount

 £ 50,000.00

 

     2.624

 

 

Instalment per year

 £ 19,052.58

 

Loan Amortisation Table

 

 

 

 

 Year

Opening Balance

Instalment Amount

Interest Amount

Principle Amount

Closing Balance

1

 £              50,000.00

 £                 19,052.58

 £                 3,500.00

 £              15,552.58

 £            34,447.42

2

 £              34,447.42

 £                 19,052.58

 £                 2,411.32

 £              16,641.26

 £            17,806.15

3

 £              17,806.15

 £                 19,052.58

 £                 1,246.43

 £              17,806.15

 £                           -   

Present value of required deposit calculation

year

DCF @ 7% p.a.

Amount to be received

PV of amount to be received

1

0.935

 £                       900.00

 £                                          841.12

2

0.873

 £                       900.00

 £                                          786.09

3

0.816

 £                       900.00

 £                                          734.67

Lump sum amount of deposit

 

 

 £                                      2,361.88

Evaluation of alternative projects

 

PROJECT A

 

 

 

Years

Cash Flows

[email protected] 6.45%

PV of Cash Flows

0

-£             50,000.00

1.000

-£                                   50,000.00

1

 £              17,000.00

0.939

 £                                    15,969.94

2

 £                8,000.00

0.882

 £                                      7,059.90

3

 £              19,000.00

0.829

 £                                    15,751.31

4

 £              16,000.00

0.779

 £                                    12,460.55

5

 £              15,000.00

0.732

 £                                    10,973.95

NPV

 

 

 £                                    12,215.65

 

 

PROJECT B

 

 

 

Years

Cash Flows

[email protected] 6.45%

PV of Cash Flows

0

-£             50,000.00

1.000

-£                                   50,000.00

1

 £                             -   

0.939

 £                                                   -   

2

 £                             -   

0.882

 £                                                   -   

3

 £                             -   

0.829

 £                                                   -   

4

 £                             -   

0.779

 £                                                   -   

5

 £              95,500.00

0.732

 £                                    69,867.47

NPV

 

 

 £                                    19,867.47

Decision: NPV of Project B is higher than that of Project A. Hence Project B must be selected.

References:

Allen, K. 2016. Seven ways government could lift the economy's post-Brexit vote blues. Available from: < https://www.theguardian.com/business/2016/aug/05/seven-ways-government-could-lift-the-economys-post-brexit-vote-blues> Accessed on: 12.07.2018.

Bhat, S. 2008. Financial management: Principles and practice 2nd ed. India: Excel Books.

Bouchaud, J.P., Farmer, J.D. and Lillo, F. 2008. How markets slowly digest changes in supply and demand. Available from: < https://arxiv.org/pdf/0809.0822.pdf> Accessed on 12.07.2018.

Delgado, C.L., 2003. Fish to 2020: Supply and demand in changing global markets 1st ed. Malaysia: WorldFish.

Dreher, A., Gaston, N. and Martens, P. 2008. Measuring globalisation: Gauging its consequences 1st ed. Germany: Springer Science & Business Media.

Drury, C.M. 2013. Management and cost accounting 3rd ed. Germany: Springer.

Gereffi, G., Humphrey, J., Kaplinsky, R. and Sturgeon, T.J. 2001. Introduction: Globalisation, value chains and development. IDS bulletin, 32(3), pp.1-8.

Hansen, D., Mowen, M. and Guan, L. 2007. Cost management: accounting and control 6th ed. U.S: Cengage Learning.

Inman, M.L. 2014. Cost Accounting 1st ed. U.K: Butterworth-Heinemann.

Ionescu, A. & Dumitru, N.S. 2011. Multinational Companies under The Globalization Context. Available from: < ftp://ftp.repec.org/opt/ReDIF/RePEc/rau/journl/SP12/REBE-SP12-A9.pdf> Accessed on 12.07.2018.

Landefeld, S. 2003. Globalization and Multinational Companies: What Are the Questions, and How Well Are We Doing in Answering Them? Available from: < https://www.bea.gov/papers/pdf/Globalization.pdf> Accessed on 12.07.2018.

Nuryanah, S. and Islam, S. 2015. Corporate Governance and Financial Management: Computational Optimisation Modelling and Accounting Perspectives 1st ed. Germany: Springer.

Pettinger,  T. 2017. Policies for Economic Growth. Available from: < https://www.economicshelp.org/blog/5272/economics/policies-for-economic-growth/> Accessed on 12.07.2018.

Principles of Economies. 2018. Demand, Supply, and Equilibrium in Markets for Goods and Services. Available from: https://opentextbc.ca/principlesofeconomics/chapter/3-1-demand-supply-and-equilibrium-in-markets-for-goods-and-services/> Accessed on: 12.07.2018.

Schifferes, S., 2007. Globalisation shakes the world. Available from: < https://news.bbc.co.uk/2/hi/business/6279679.stm> Accessed on: 12.07.2017.

Stearns, P.N. 2016. Globalization in World History 2nd ed. U.S: Routledge.

UK Government. 2015. Policy paper: 2010 to 2015 government policy: UK economic growth. Available from: < https://www.gov.uk/government/publications/2010-to-2015-government-policy-uk-economic-growth/2010-to-2015-government-policy-uk-economic-growth> Accessed on: 12.07.2018.

Van Horne James, C. 2002. Financial Management & Policy 12th ed. India: Pearson Education.

Zimmerman, J.L. and Yahya-Zadeh, M. 2011. Accounting for decision making and control. Issues in Accounting Education, 26(1), pp.258-259.

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