Task 1

You are required to define the two major branches of economics and
discuss how they influence business performance (700 words)

There are two main branches of economics, microeconomics, and

macroeconomics.

MICROECONOMICS

Microeconomics deals with the behavior of individual households and firms

and how that behavior is influenced by government. According to Humberto
Barreto (2012), its first traces are in a 1933 article by Ragnar Frisch for whom
the micro approach would “try to explain in some detail the behavior of a
certain section of the huge economic mechanism,” while the macro would
instead “give an account of the fluctuations of the whole economic
system taken in its entirety” (Frisch, 1933: p. 2).

Six microeconomic business factors that affect almost any business are
customers, employees, competitors, media, shareholders and suppliers.

 The Impact of Customers: Customers have the most direct

microeconomic impact on a business. The simple fact is that you can't
successfully operate a for-profit company without attracting targeted
customers. Knowing ideal customer types and developing and
presenting effective marketing campaigns are integral to building a
customer base and generating revenue streams.
 Availability of Employees: workers produce, sell or service the
goods and service that drive your business. The availability of
qualified, motivated employees for your business type is vital to
economic success. If a company operate a highly technical business,
for instance, it might have to pay more in salary to attract a limited
number of available, specialized workers

Page 1 of 17
  Distribution Channels and Suppliers: Sourcing goods used in
production or resale and distributing business inventory to customers
are important as well. Manufacturers rely on materials suppliers and
resale companies rely on manufacturers or wholesalers to transport
goods. To operate profitably, a business needs to get good value on
products and supplies and, in turn, offer good value to customers with
accessible solutions.
 Level of Competition: The level of competition also impacts your
economic livelihood. In theory, more competitors means business
share of dollars customers spend diminishes. However, a large number
of competitors in an industry usually signifies lots of demand for the
products or services provided. If an industry lacks competition, you
might not find enough demand to succeed in the long run.
 Availability of Investors: Shareholders and investors may help fund
company at start-up or as a business looks to grow. Without funds to
build and expand, business likely can't operate a business. Business
could look to creditors, but you must repay loans with interest. By
taking on investors, you share the risks of operating and often gain
support and expertise. You do give up some control, though.
 Media and the General Public: Local community and media also
affect your ongoing business image. Communities often support
companies that provide jobs, pay taxes and operate with social and
environmental responsibility. If a business owner doesn’t do these
things, the business may run into negative public backlash. Local
media often help business story proliferate, for better or worse.

MACROECONOMICS

Microeconomics involves factors of resources availability and usage that

impact individuals and businesses. As a company operator, understanding
the core microeconomic factors affecting your business helps in planning and
preparation, as well as long-term business strategy development.

Page 2 of 17
Macroeconomics is concerned with economy-wide factors such as inflation,
unemployment, and overall economic growth

Macroeconomics entails the study of the overall economy as a whole rather

than individuals and companies. Macroeconomic factors or macroeconomic
conditions affect the national economy, including geopolitical problems and
fiscals. The macroeconomic factors affecting business incorporate
inflationary rate, unemployment rate, interest rate, and economic output,
among others. The variables in macroeconomics usually affect populations
rather than individuals. For example, inflation and unemployment rates
affect a population. Also, they are indicators of how the economy performs
by looking at businesses and government functions or operations and how
they collect revenue. If a nation manages to control inflation, there will be a
decrease in the unemployment rates because businesses can hire in mass.
The government can collect enough revenue, and the currency will be strong.
Microeconomic factors also include regulations and taxes that may affect a
business's investment process, which is vital in building a nation's economy.

Macroeconomic factors include:

Macroeconomic factors have a significant impact on businesses. Economic

growth, measured by real gross domestic product per capita, and variation in
demand have been found to positively influence the creation of new
enterprises .

Inflation, population growth rate, and unemployment rate also contribute to

the creation of new firms, although their effects may be relatively low.
Additionally, macroeconomic variables such as inflation rate, economic
growth, exchange rate, and share price have been found to affect the
performance of listed companies.

Page 3 of 17
In particular, economic growth and share price have a positive impact on
asset returns and equity return in the long run. However, in the short run, the
influence of these variables on company performance may not be significant.
Furthermore, macroeconomic factors such as inflation rate, unemployment
level, gross domestic product, and exchange rate have been found to
influence firm profitability, with gross domestic product having a significant
impact.

Overall, macroeconomic factors play a crucial role in shaping the

performance and creation of businesses.

Task 2

You are to explain accounting conventions and evaluate how

important are they in the preparation of the three major financial
statements (600 words)

Accounting conventions are guidelines used to help companies determine

how to record certain business transactions that have not yet been fully
addressed by accounting standards. These procedures and principles are not
legally binding but are generally accepted by accounting bodies. Basically,
they are designed to promote consistency and help accountants overcome
practical problems that can arise when preparing financial statements.

Importance of Accounting Concepts for Preparing Financial

Statements

Accounting concepts and conventions as used in accountancy are the rules

and principles applied when recording economic events and in the
preparation of financial statements, that all accountants abide by. Some of
the fundamental accounting concepts that will be discussed are the accruals,
matching, prudence, going concern and consistency concepts.

Page 4 of 17
1. Money measurement concept – Accounting normally deals with only
those items that are capable of being expressed in monetary terms.
Money has the advantage that it is a useful common denominator with
which to express the wide variety of recourse’s held by a business.
However, not all such resources are capable of being measured in
monetary terms and so will be excluded from a balance sheet. The
money measurement concept, thus, limits the scope of accounting
reports.

2. Historic cost concept – Assets are shown on the balance at a value

that is based on their historic cost (that is, acquisition cost). This
method of measuring asset value has been adopted by accountants in
preference to methods based on some form of current value. Many
commentators find this particular convection difficult to support as
outdated historic cost are unlikely to help in the assessment of current
financial position. It is often argued that recording assets at their
current value would provide a more realistic view of financial position
and would be relevant for a wide range of decisions. However, a
system of measurement based on current values can present a number
of problems.

3. Going concern concept – The going concern concept holds that a

business will continue operations for the foreseeable future. In other
words, there is no intention or need to sell off the assets of the
business. Such a sale may arise when the business is in financial
difficulties and it needs cash to the creditors. This convention is
important because the value of fixed assets on sale is often low in
relation to the recorded values, and an expectation of having to sell off
the assets would mean that anticipated losses on sale should be fully
recorded. However, where there is no expectation of the need to sell
off the assets, the value of fixed assets can continue to be shown at
their recorded values (that is, based on historic cost). This concept,

Page 5 of 17
 therefore, provides support for the historic cost concept under normal
circumstances.

4. Business entity concept – For accounting purposes, the business

and its owner(s) are treated as quite separate and distinct. This is why
owners are treated as being claimants against their own business in
respect of their investment in the business. In the business entity
concept must be distinguished from the legal position that may exist
between businesses and their owners. For sole proprietorship and
partnerships, the law does not make any distinction between the
business and its owner(s). For limited companies, on the other hand,
there is a clear legal distinction the business and its owners. For
accounting purposes, these legal distinctions are irrelevant and the
business entity convention applies to all businesses.

5. Dual aspect concept – Each transaction has two aspects, both of

which will affect the balance sheet. Thus, the purchase of a motor car
for cash results in an increase in one asset (motor car) and a decrease
in another (cash). The repayment of a loan results in the decrease in
liability (loan) and the decrease in asset (cash/bank)

6. Prudence – The prudence concept holds that financial statements

should err on the side of caution. The concept evolved to counteract
the excessive optimism of some managers and owners, which resulted,
in the past, in an overstatement of financial position. Operation of the
prudence concept results in the recording of both actual and
anticipated losses in full, whereas profits are not recognized until they
are realized (that is, there is reasonable certainty that the profit will be
received). When the prudence concept conflicts with another concept,
it is prudence concept that will normally prevail.

7. Stable monetary unit concept – The stable monetary unit concept

or consistency concept holds that money, which is the unit of

Page 6 of 17
 measurement in accounting, will not change in value over time. The
consistency is concept is also of vital importance for businesses. The
consistency concept dictates that there should be ‘consistency of
accounting treatment of like items within each accounting period and
from one period to the next’. For example deprecation should be
calculated the same way for every financial year and the purchase of
certain tools and equipment should also be treated as fixed assets in
subsequent years. This is to ensure meaningful comparisons can be
made between different accounting periods and limit the possibility of
misrepresentation.

8. Objectivity concept – The objectivity concept seeks to reduce

personal bias in financial statements. As far as possible, financial
statements should be based on objective, verifiable evidence rather
than matters of opinion.

9. Separate determination concept – The separate determination

concept refers to in determining the aggregate amount of each asset
or liability, the amount of each individual asset or a liability should be
determined separately from all other assets and liabilities.

10. Substance concept – The substance over form holds if legal

form of the transaction differs from its real substance, accounting
should show the transaction in accordance with its real substance, i.e.,
how the transaction affects the economic situation of the business.

Task 3

Using the information from the given financial statements,

statement of financial position (balance sheets) and income
statement (profit & loss accounts) in page 3, calculate and interpret
the following ratios for XYZ Plc for the years ended March 31 2019
and 2020, respectively:

Page 7 of 17
 a) Operating Profit Margin:

The operating margin measures how much profit a company makes on a

dollar of sales after paying for variable costs of production, such as wages
and raw materials, but before paying interest or tax

For year ended March 31, 2019:

= 222 = 0.088 = 8%
2500

For year ended March 31, 2020:

= 15 = 0.0055 = 0.55%
2750
Interpretation:
XYZ’s drastically declined between 2019 and 2020 indicating poor
performance in sales revenue.
b) Inventory days:

Days in inventory is the average time a company keeps its inventory before
it is sold. To calculate days in inventory, divide the average inventory cost by
the cost of goods sold and multiply that by the period length, usually 365
days.

Page 8 of 17
For year ended March 31, 2019:

= 350/2 = 175/925 = 0.189 = 18.91%

1850/2

For year ended March 31, 2020:

= (350+410)/2 = 380/2112.5 = 0.179= 17.99%

(1850+2375)/2
Interpretation:
XYZ’s cost of sales declined from 18.91% to 17.99% between 2019 and
2020 indicating poor performance.

c) Payable period:

Average payable period ratio is the average money owed by a company to its
suppliers as per the balance sheet. Total Credit Purchases is the total amount
of credit purchases made by the company during a particular period of time.

Accounts Payable Days (DPO) is a crucial financial metric for assessing a

company's efficiency in managing its payable obligations. It indicates the
average number of days the business takes to pay its invoices. Here’s a step-
by-step breakdown of the formula:

DPO =
Average Accounts Payable

Cost of Goods Sold (COGS) X 365

Page 9 of 17
For year ended March 31, 2019:

= 165/2 = 82.5/1850 x 365= 0.04459 x 365 = 16.27 days

1850

For year ended March 31, 2020:

= (165+200)/2 = 182.5/2112.5 x 365 = 31.53 days

(1850+2375)/2
Interpretation:
XYZ’s ability to pay its payables drastically declined from 16.27 days in 2019
down to 31.53 days in 2020. This implies that with this trend, the company
may not be in position to timely pay its suppliers which demonstrates poor
performance.

d) Receivable period:

The account receivable collection period measures the average number of

days that credit customers usually make the payment to the company. The
formula for the average collection period is:

Average accounts receivable ÷ (Annual sales ÷ 365 days) = Average

collection period

For year ended March 31, 2019:

= 240/2 = 120/6.849 = 17.52 days

2500/365

For year ended March 31, 2020:

= (240+280)/2 = 260/7.192 = 36.15 days

(2500+2750)/2÷365

Page 10 of 17
Interpretation:
It took twice as number of days to collect debts in 2020 than it was in 2019.
XYZ’s ability to collect its debts dwindled indicating inefficiency in the debt
collection system.

e) Acid Test Ratio:

The acid-test ratio compares a company's “quick assets” (cash and accounts
receivable) to its current liabilities. It is one of six basic calculations used to
determine short-term liquidity—the ability of a company to pay its bills as
they come due.

For year ended March 31, 2019:

= 350+240+5 = 595/190 = 3.12

190

For year ended March 31, 2020:

= (595+690)/2 = 642.5/242.5 = 2.65

(190+295)/2
Interpretation:
There was a slight improvement of XYZ’s ability to pay its debt as and when
they fall due between 2019 to 2020

f) EPS (Earnings Per Share):

Page 11 of 17
EPS (Earnings Per Share) measures the net profits of a company attributable
to common shareholders, expressed on a per-share basis. The earning per
share (EPS) is the ratio between a company's net income and its weighted
average number of common shares outstanding.

For year ended March 31, 2019:

Number shares (after adjusting the price) = 400 ÷ 0.50 = 800 shares
Number shares (before adjusting the price) = 400 ÷ 3 = 133 shares
Weight = (800-133)/800 x 100 = 0.833
Preferred dividend = 3 x 800 shares= 2,400
Weighted Average shares = 0.833 x 800 shares = £667
Net Income = £ 167
EPS = 167-2400 = -3.34
667

For year ended March 31, 2020:

Number shares (after adjusting the price) = 400 ÷ 0.50 = 800 shares
Number shares (before adjusting the price) = 400 ÷ 3 = 133 shares
Weight = (800-133)/800 x 100 = 0.833
Preferred dividend = 3 x 800 shares= 2,400
Weighted Average shares = 0.833 x 800 shares = £667

Page 12 of 17
Net Income = £ 12
EPS = 12-2400 = -3.58
667

Interpretation:
XYZ’s share value has dwindled to negative value between 2019 to 2020

Word count (550 words)

Task 4

Define management accounting and discuss why this is important

for planning, control and decision-making within an organisation.
(650 words)

According to the Chartered Institute of Management Accountants (CIMA),

Management

Accounting is “the process of identification, measurement, accumulation,

analysis, preparation, interpretation and communication of information used
by management to plan, evaluate and control within an entity and to assure
appropriate use of and accountability for its resources.

Management accounting also comprises the preparation of financial reports

for non-management groups such as shareholders, creditors, regulatory
agencies and tax authorities”

This definition points out that management is entrusted with the primary
task of planning,

execution and control of the operating activities of an enterprise. It

constantly needs accounting information on which to base its decision. A
decision based on data is usually correct and the risk of erring is minimized.
The position of the management in respect of its functions can be compared
to that of an army general who wants to wage a successful battle. A general

Page 13 of 17
can hardly fight successfully unless he gets full information about the
surrounding situation and the extent of effectiveness of each of his battalions
and, to the extent possible, even the enemy’s intentions. Like a general a
successful management too strives to outstrip other competitors in the field
by streamlining its operating efficiency. It needs a thorough knowledge of the
situation and the circumstances in which the firm operates. Such knowledge
can only be gained through the processed financial data rendered by the
accounting department on the basis of which it can take policy decision
regarding execution, control, etc. It is here that the role of management
accounting comes in. It supplies all sorts of accounting information in the
form of such statements as may be needed by the management. Therefore,
management accounting

is concerned with the accumulation, classification and interpretation of

information that assists individual executives to fulfill organizational
objectives.

Importance of Management Accounting in planning, control and

decision-making within an organisation

The basic function of management accounting is to assist the management

in performing its functions effectively. The functions of the management are
planning, organizing, directing and controlling. Management accounting
helps in the performance of each of these functions in the following ways:

 Provides data: Management accounting serves as a vital source of data

for management planning. The accounts and documents are a
repository of a vast quantity of data about the past progress of the
enterprise, which are a must for making forecasts for the future.
 Modifies data: The accounting data required for managerial decisions is
properly compiled and classified. For example, purchase figures for
different months may be classified to know total purchases made
during each period product-wise, supplier-wise and territory-wise.

Page 14 of 17
 Analyses and interprets data: The accounting data is analyzed
meaningfully for effective planning and decision-making. For this
purpose the data is presented in a comparative form. Ratios are
calculated and likely trends are projected.
 Serves as a means of communicating: Management accounting
provides a means of communicating management plans upward,
downward and outward through the organization. Initially, it means
identifying the feasibility and consistency of the various segments of
the plan. At later stages it keeps all parties informed about the plans
that have been agreed upon and their roles in these plans. Goals
 Facilitates control: Management accounting helps in translating given
objectives and strategy into specified goals for attainment by a
specified time and secures effective accomplishment of these in an
efficient manner. All this is made possible through budgetary control
and standard costing which is an integral part of management
accounting.
 Uses qualitative information: Management accounting does not restrict
itself to financial data for helping the management in decision making
but also uses such information which may not be capable of being
measured in monetary terms. Such information may be collected form
special surveys, statistical compilations, engineering records, etc.

Page 15 of 17
References

1. Abassi, B., & Taffler, R. J. (1982). Country risk: A model of economic

performance related to debt servicing capacity ( Working paper 36).
City University Business School, London.

2. Agarwal, V., & Taffler, R. J. (2008). Comparing the performance of

market-based and accounting-based bankruptcy prediction
models. Journal of Banking and Finance,
1541–1551.10.1016/j.jbankfin.2007.07.014

3. Ahmed, M. (2006). An empirical study to find out the relationship

between macroeconomic variables, financial variables, bank-specific
variables and bank profitability in context of Bangladesh ( BBA
dissertation). Independent university,

4. Ali, A., Klein, A., & Rosenfeld, l. (1992). Analysts’ use of information
about permanent and transitory earnings components in forecasting
annual EPS. Accounting Review, 67, 183–198.

5. Altman, E. I. (1968). Financial ratio’s discriminant analysis and the

prediction of corporate bankruptcy. The Journal of Finance, 23(4), 589–
609.10.1111/j.1540-6261.1968.tb00843.x

6. Altman, E. I., Haldeman, R. C., & Narayanan, P. (1977). Zeta analysis: A

new model to identify bankruptcy risk of corporations. Journal of
Banking and Finance, 1(1), 29–54.10.1016/0378-4266(77)90017-6

7. Andreica, M. E. (2009). Predicting Romanian financial distressed

companies ( MSc dissertation). Doctoral School of Banking and Finance,
Bucharest.

Page 16 of 17
8. Andreica, M. E., Andreica, M. I., & Andreica, M. (2009). Using financial
ratios to identify Romanian distressed companies. Economia seria
Management, 12(1), 47–55.

Page 17 of 17