Category: Commerce Notes PPT

Closing Stock is the amount of the unsold stock which is lying idle in the business on a given date, waiting to be sold. This is the inventory that is left after all the sales done by the business. This closing stock has various names– Raw materials, Work-in-progress, or also known as the finished goods.   

At the closing period, that is at the end of a financial year, the inventory lying with the business is known as the Closing Stock or the Closing Inventory. This may include products that are not sold but then already processed by the company.  The stock is determined in a physical amount which comprises the calculation of the raw materials, work-in-progress, or other such classes of Closing Stock.  

Closing Stock Formula

As explained earlier, the closing stock at the end of a year or at the end of a reporting year is called the closing inventory or the closing stock. This stock still is in the hand of the business, which might be in any form– unprocessed or semi-processed, in the form of raw materials or WIP. 

At the end of the year, a physical counting is done to ascertain the number of stocks remaining with the company. The number can also be determined with the help of various other methods as well, one of the popular methods is the perpetual inventory system. Also, the cycle counting method is enabled which keeps in the notice of the additional count that has been added to the current stock. 

The formula for Closing Stock = Opening Stock + Purchases – Cost of the Goods Sold.

There are quite a number of ways to calculate the closing stock. Among which popular are these:

• First in, first-out method

• Last in, first-out method

• Retail Inventory Method

• Weighted Average Method

These methods are in use in different organizations that serve different motives altogether. The calculation is again adjusted to another method which is known as the lower cost or market (LCM) rule, which states that those inventory items are to be recorded at the lowest cost or at their current market value. In reality, this LCM method is used only once in a single year. This is done in order to comply with the GAAP (Generally Accepted Accounting Principles).

Closing Stock in Balance Sheet 

The Closing Stock is represented on the Asset Side of the Balance Sheet. While at times in the Trial Balance, this is adjusted with the purchase, which is given in the Opening Stock and Closing Stock are adjusted through purchases. Then both the Adjusted Purchases A/c and the Closing Stock Account appear in the Trial Balance.

The Adjusted Purchases amount may be taken to the debit side of the Trading Account and then the Closing Stock appears on the Asset side of the Balance Sheet. This is to be noted that under this circumstance, the Closing Stock will not appear in the Trading Account. In the following year, the Closing Stock turns to the next year’s Opening Stock.

Valuation of Closing Stock 

Keeping in view the requirement of the company, the nature of stock, the valuation methods can be used to determine the value of the closing stock. These are popularly known as the inventory valuation methods.

Following are the Methods:

The way and methods that are used to calculate the closing stock differ from each other. This has a direct impact on the profitability of the business. Thus, with this result, it is crucial for businesses to choose a method that is more relevant to the products that they deal with.

The social science of economics is possibly as old as humanity itself. In ancient and mediaeval India, people would transact using various objects such as grains, gold, silver, etc. The Arthashastra which is one of the greatest treatises on politics also details out the steps to run an economically prosperous kingdom. Even Shri Rama can be seen teaching Bharata the same in the Ramayana. Indians were the original traders, trading through some of the greatest sea routes in the world. Marine trade flourished during the times of Raja Raja Chola of the Chola dynasty. The Indian or Hindu scriptures tell us that “Artha” or “rightful garnering of wealth” is one of the four goals of human living. 

Hence, we can see that economics has always existed even if the current form of money did not, as it is essential for the survival of society. What then is this art and science all about?

Economics, Wealth and Welfare

Firstly, we must understand that economics is not about money alone. It is a lot more than that. It is a well-developed and dynamic science that focuses on various aspects such as production, sustenance, delivery and use of goods and services, lending and taking, fluidity of funds and so on. Economists are those who study how governments, countries, organisations and people take decisions pertaining to resource consumption. 

As human beings, we behave in ways that will allow us to reap the maximum benefits out of any undertaking. Economics also studies this behaviour and its impact on the individual’s life and larger economic well-being. Wealth can be defined in general terms as an abundance of availability of material assets or resources. Wealth can be categorised as : 

Personal Wealth – It includes personal assets that an individual earns over his lifetime such as gold, houses, property, lands, stocks and shares, cash in hand or in the bank, etc.

National Wealth – It is defined as the wealth of an entire nation or country including government bonds, public properties, national reserves, etc.

The Concepts of Wealth and Welfare

While welfare is defined as the overall well-being of a society, it exists only when the nation has wealth which is an abundance of monetary assets in various forms. Even though wealth and welfare are different concepts, they go hand in hand as one cannot exist or have meaning without the other. When an individual owns wealth, it brings welfare not only to them but also to the community around them. Similarly, in the absence of wealth, society suffers and welfare decreases. Hence both are of equal importance. 

Defining Investment

When a person buys or acquires certain financial assets to generate income for himself or acquire goodwill or do both, it is called investment. Investment always happens with a specific intention – to achieve returns or benefits. It is future-oriented hence it might entail certain risks that people take willingly. Especially when someone invests in stocks or share markets, they know they will reap benefits if the share prices of that company soar high but they also stand to lose if it suddenly declares bankruptcy. 

Investment is a game of profit and loss with a lot of risks and speculations involved. However, it is one of the major means of saving up for the future. 

Types of Investments

There are two major types of investments: 

1. Growth Investment – Because it is related to market changes, it entails many ups and downs and is more suitable for long-term investors who are aware and ready to take risks – 

• Shares: Investors get periodic dividends as part of the company’s profit that is regularly paid to shareholders. The value of shares do vary and dividends are also dependent upon the profits a company makes. If you master the art of investing in shares, this can become a major source of garnering assets! 

• Property: This is a growth investment because pieces of properties show spikes over a period of time. It is risky but if one speculates right, they are in for high returns! 

2. Defensive Investment – It generates regular incomes and is meant for those who wish to remain stable and not risk too much over a long period of time. 

• Cash – It includes bank deposits, savings accounts etc. Although the returns are regular, they have low potential and there is barely any capital growth. It is something a common man depends on. 

• Fixed Interests – When governments or companies borrow money from investors and pay them a rate of return, it is called bonds that have the lowest risk. They can be sold off pretty quick.

Consignment is a type of arrangement where the goods are left in the possession of an authorized third party to sell. Generally, the consignor receives a percentage of the revenue from the sale which is at times a very large percentage, and that is in the form of commission.

Consignment is a shop which sells goods on behalf of an owner. The owner who keeps the ownership of his item until it sells, although if it sells. As the owner, one may pay even a small fee to the shop as compensation for selling the owner’s item. 

Define Consignments 

Consignment is actually a set arrangement where the goods are left in the possession of a third party who is authorized to sell the product. The consignor who receives a percentage of the revenue from the sale (sometimes at a very large percentage) is in the form of commission.

Consignment here deals with a variety of products, such as the artwork, clothing and accessories, also with the books. Even the retail stores may be considered as a special form of consignment where the producers rely on the retail stores to sell their products to the consumers, moreover, the second-hand stores and the thrift stores are associated with this arrangement of consignment.

Consignment, however, does not include the retailers such as the Walmart or the supermarkets, who purchases goods outright from the wholesalers and then mark their item up.  

Understanding Consignment

In today’s era, the consignment shops have become trendy, especially those who offer a speciality in their products, like infant wear, pet care, or even the high-end fashion items. Today’s generation is known for their frugal shopping habits, which include buying from the high-end stores and designer boutiques, they are in favour of bargains which are found at the thrift and consignment shops.

Advantages of Consignment

Selling on consignment is a great option for every individual. To a certain extent, online companies like eBay are the consignment shops as for a percentage of the sale, they offer people a marketplace to exhibit and then sell their wares and items. This removes the requirement for an individual to create their own website, attract other customers, and also set up payment processes. Likewise, the items to be marketed and sold through television channels are also forms of consignment.

Sellers lack the time or their desire to advertise their product for sale, or to take time off work to accommodate the prospective buyers’ schedules, to conduct the pricing research, and then to endure the tasks associated with the selling an item often find the consignment fees is a smaller pay to put the work in someone else’s hands, particularly if they are successful in negotiating to a low fee.

Examples of Consignment

A film artist has five large pieces of artwork to sell but does not have a place to showcase their work for prospective buyers. The artist then decides to employ a theatre to show and sell his works of art. The theatre does not charge the artist a fee for space but will charge a sales commission for any art or work sold, which is incorporated into the price paid.

Another example of the consignment would be Bini visiting her grandmother’s house and finding an old case full of clothes. She keeps a few pieces that she likes and decides to sell the rest of them. She takes the clothes to a second-hand store to sell the clothes on consignment. Bini and the store come to an agreement that Bini will receive 60% of the revenues from the items that are sold while the store will receive the remaining 40% of the profit.

An economy consists of various industries that help make it a whole and it is important to understand that all these industries no matter how small still contribute a lot not just in terms of the GDP but also other facts like employment. The different compositions of an economy include industries like service, manufacturing, engineering, agriculture, etc. These industries have benefited the economy in so many ways by providing production of goods and services, employment generation, and equal distribution of income in the entire economy. The service sector itself contributes the most to the economy around 60 percent to the Indian GDP whereas the Agriculture sector only provides 14%.

Major Industries of India

Generally, India has six major industries which contribute to the growth of the country in various ways. They are,

• Iron and Steel

• Textiles

• Jute

• Sugar

• Cement

• Paper

New Addition of Major Industries

Apart from this, there are four new industries that have joined this list, They are,

All these industries play a major role in the Indian economy. Therefore, to understand the growth of these industries one should have a good knowledge of the relationship between growth and government policies.

Role of Major Industries in the Development of India

Iron and Steel Industry

One of the most important industries in India is the iron and Steel industry which has a large capital investment. It offers employment opportunities to around 2.5 lakh workers across the country. According to the World Steel Association, India is considered one of the top 10 manufacturers of steel around the world. Despite the industrial importance of steel, it also imports large quantities of steel from foreign countries every year.

Textile Industry (Cotton and Synthetic)

This industry is a bit complicated. These industries have two extreme ends. One is the well-sophisticated and mechanized mills, whereas the other is based on hand-looming, weaving, and spinning. In between both ends, there is the decentralized loom sector. Considering all these three as a whole, It has become the largest industry in India. It contributes around 20% of the industrial output, 33% of the total export earnings, and provides employment opportunities for around 20 million people.

Jute Industry

In India, Jute Industry contributes around 30% of the jute output around the world. It has the capacity to earn foreign exchange as most of them are exported to various parts of the world. It also provides employment opportunities for around 2.5 lakh individuals. In India, around 40 lakh families depend on jute cultivation. 

Sugar Industry

India is considered one of the largest sugar-producing countries around the world. It is the second largest agro-based industry in India. It provides direct employment opportunities to approximately 3.25 lakh people and also gives indirect employment opportunities to 45 million people such as farmers, traders, etc.

Information Technology (IT) Industry

The IT industry is one of the newest entrants to this list. The growth of IT in India is increasing rapidly day by day. Many foreign clients from the US and EU have a strong bond with India for IT software development and outsourcing services. 

Automobile Industry

The liberalization of the Indian economy results in the tremendous growth of the automobile industry. New manufacturers from foreign countries with emerging technologies had replaced the traditional manufacturers. There is a big competition in this market followed by certain regulations from the Indian government regarding the emissions that have led to an improvement in standards.

Banking Industry

The Indian banking industry is one of the largest industries across India. The updated technology in this firm over the years has made transactions easy for the people. At present, there are different types of banks in India such as,

• Savings Banks.

• Commercial Banks.

• Scheduled Banks.

• Public Sector Banks.

• Private Sector Banks.

• Foreign Banks.

• Non-Scheduled Commercial Banks.

• Industrial or Development Banks.

• Land Mortgage or Land Development Banks.

• Indigenous Banks.

• Central or Federal or National Bank (Reserve Bank of India).

• Cooperative Banks.

• Foreign Exchange Banks.

• Consumer Banks.

In very simple terms, a bank is separated from other financial banks by credit creation. Credit Creation is the expansion of the deposits. Also, the banks can expand their demand deposits as a multiple of their cash reserves because the demand deposits serve as a principal medium of exchange.

Demand deposits are a very crucial constituent of the money supply. The expansion of the demand deposits means the expansion of the money supply. The entire banking structure is based on credit. The meaning of credit is to get the purchasing power now and promise to pay at some time in the future. And bank credit means the bank loans as well as the advances. A bank keeps a certain part of its deposits as a minimum reserve to meet the demands of its depositors and the rest is lending out to earn an income. The account of the browser is given the loan. Every bank creates an equivalent deposit in the bank. Hence, credit creation means expanding bank deposits.

The Two Pivotal Aspects of Credit Creation

1. Liquidity

The banks are bound to pay cash to their depositors when they exercise their right to demand cash against their depositors.

2. Profitability 

The banks always look for profit. They are profit-driven enterprises. This is the reason why a bank must grant loans in such a manner that will help to earn higher interest than what it pays on its deposits.

The bank’s credit process is based on the assumption that at any time only a few customers will genuinely need cash. Also, on the other hand, the banks assume that all their customers will not turn up demanding cash against their deposits at one point in time.

Know About the Basic Concepts of Credit Creation

1. Bank as a business institution

One has to believe that banks are a business institution that always tries to maximize profits through loans and the advances from the deposits.

2. Bank Deposits

Bank deposits are the basis for credit creation. Bank deposits are of two types as follows:

 a. Primary Deposits- 

A bank accepts cash from the customers and opens a deposit in his or their name. This is called a primary deposit and this does not mean a credit creation. 

These deposits are simply converted into deposit money from currency money. These deposits form the basis for credit creation.

b. Secondary or Derivative Deposits- 

A bank grants loans and advances. Instead of giving cash to the borrower, the bank opens a deposit account in his or her name. This is called the secondary or derivative deposit.

Every loan creates a deposit and the creation of a derivative deposit means the creation of the credit.

Process of Credit Creation by Commercial Banks

A central bank is the primary source of money supply in an economy of a nation through the circulation of currency. It ensures the availability of the currency for meeting the transaction needs of an economy. It also facilitates various economic activities such as production, distribution as well as consumption. For this purpose, the central bank needs to depend upon the reserves of the commercial banks which are the secondary source of money supply in an economy.

The most crucial purpose of a commercial bank is the creation of credit. This is the reason why the money supplied by commercial banks is called credit money. All commercial banks create credit by advancing loans and purchasing securities. They lend money to the individuals as well as to the businesses out of deposits accepted from the public.

Commercial banks are not allowed to use the entire amount of public deposits for lending purposes. They are accepted to keep a certain amount as a reserve with the central bank. This is for serving the cash needs of the depositors.

The commercial banks can lend the remaining portion of the public deposits after keeping the expected amount of reserves.

Factors affecting Credit Creation by Commercial Banks

Factors that have an Effect on the Creation of Credit are as follows:

1. The capacity of the bank banks to create credits which are a matter of the availability of cash deposits with banks. Also, the capacity to create credit depends on the factors that determine their cash deposit ratio.

2. The desire of the banks to create credits.

3. The demand for credit in the market.

Advantages and Limitation of Credit Creation by Commercial Banks

On the advantageous side, the depositors can access a wider range of products that the intermediaries offer that can easily be converted into cash. Investment of the company shares (mutual funds) can also be liquidated in a very easy manner.

On the disadvantageous side, there are several limitations, these are as follows:

1. Lack of securities.

2. The Business Environment

3. Lack of Cash

4. The habits of the people

5. Leakages

Demand forecasting is an amalgamation of two words; the first one is known as demand, and another one is forecasting. The meaning of demand is the outside requirements of a manufactured product or a useful service. In general aspects, forecasting usually means making an approximation in the present for an event that would be occurring in the future. 

All the companies use these predictions to format their approach to marketing and sales. It contributes hugely towards increasing their profit margins. Here, we are stepping forward to elaborate on demand forecasting, its features and its usefulness. Moreover, we will also see its applications.

 

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Definition of Demand Forecasting

Demand forecasting is a technique that is used for the estimation of what can be the demand for the upcoming product or services in the future. It is based upon the real-time analysis of demand which was there in the past for that particular product or service in the market present today. Demand forecasting must be done by a scientific approach and facts, events which are related to the forecasting must be considered.

Hence, in simple words, if someone asks what demand forecasting is, we can answer that after fetching information about different aspects of the market and demand which is dependent on the past, an attempt might be made to analyze the future demand. 

This whole concept of analyzing and approximations are collectively called demand forecasting. In order to understand it more clearly, we can consider the following equation so that we can understand the concept of demand forecasting more easily.

For example, if we sold 100,150, 200 units of product Z in January, February, and March respectively, now we can approximately say that there will be a demand for 150 units of product Z in April. However, there is also a clause that the condition of the market should remain the same.

 

Methods of Demand Forecasting

There are two main methods of demand forecasting: 1) Based on Economy and 2) Based on the period.

1. Based on Economy

There is a total of three methods of demand forecasting based on the economy:

• Macro-level Forecasting: It generally deals with the economic environment which is related to the economy as calculated by the Index of Industrial Production(IIP), national income and general level of employment, etc.

• Industry-level Forecasting: Industry-level forecasting usually deals with the demand issued for the industry’s products as a whole. We can consider the example where there is a demand for cement in India, Demand for clothes in India, etc.

• Firm-level Forecasting: It is a major type of demand forecasting. Firm-level forecasting means that we need to forecast the demand for a specific firm’s product. We can consider the following examples as Demand for Birla cement, Demand for Raymond clothes, etc.

2. Based on the Time

Forecasting based on time may be either short-term forecasting or long-term forecasting.

• Short-term Forecasting: It generally covers a short period which depends upon the nature of the industry. It is done generally for six months or can be less than one year. Short-term forecasting is apt for making tactical decisions.

• Long-term Forecasting: Long-term forecasts are generally for a longer period. It can be from two to five years or more. It gives data for major strategic decisions of the company. We can consider the example of the expansion of plant capacity or on opening a new unit of business, etc.

Steps Used in Demand Forecasting

The process of demand forecasting can be divided into five simple steps:

• Setting an Objective: The first step involves clearly deciding on the purpose of the analysis. That is, the manufacturers define their goals that are achievable through the analysis and compatible with their needs.

• Determining the Time Period: In this step, the manufacturer decides whether the analysis will be carried out for a short or long duration of time. Many forecasts run for a long duration as they offer more and consistent data.

• Selecting a Demand Forecasting Method: In the next step, the manufacturer decides along with the analysts which method will give the best results.

• Collection of Data: In the penultimate step, the data is collected according to the preconceived attributes for the analysis.

• Evaluation of Data: In the last step, the collected data is evaluated to obtain conclusions for the forecast.

 

Solved Example

Q. Which of the following is incorrect related to Demand Forecasting?

A. Predicts future demand for a product or service.

B. Based on the past demand for the product or service.

C. It is not based on scientific methods.

D. Helps in managerial decision-making.

Ans: The right option is C. 

Demand Forecasting is statistically based on scientific methods and proper judgment correctly predicts the future demand for a product or service. It gathers information about various aspects of the market like future changes in the selling price, product designs, changes in competition, advertisement campaigns, the purchasing power of the consumers, employment opportunities, population, etc.  

 

Fun Facts

Different approaches to Demand forecasts are done by the tech giant of the USA – Apple. They forecast the demand to actuate the quantity of the various products that it will manufacture such as iPhones, iPods, MacBooks, watches, Homepods, AirPods, etc. through a series of approaches. Moreover, the company predominantly uses consensus methods which are under the Judgmental approaches to determine their demand forecasts.