Category: Commerce Notes PPT

What are Cash and Cash Equivalents?

The lined items on a business’s balance sheet that describes the valuation of an organisation’s cash and liquid holdings are known as cash and cash equivalents. These items are liquid money or components that can be feasibly turned into money.

The cash equivalents consist of vendible securities and bank accounts that mature by 90 days or less. Sometimes, even equity or stock holdings are considered as cash equivalents as they can be sold in the stock market at short notice.

Understanding Cash and Cash Equivalents (CCE)

They are generally the group of liquid holdings acquired by an enterprise. To make it simple, it can be said that this asset category covers items that are akin to cash.

Here are some components that fall under cash and cash equivalents list.

First, take a look at the components of cash:

1. Foreign Currency

Companies that possess multiple currencies can sometimes undergo currency interchanging risk. The foreign currencies must be converted into reporting currency for accounting purposes. Results obtained after conversion must be similar to a value if that company would have calculated operations using a single denomination.

Translation losses garnered from the reduction of foreign currencies are not mentioned with CCE. However, these mislays are noted in the economic reporting account known as “accumulated other comprehensive income.”

2. Money Order

It is a financial statement given by the government or banks that a payee uses to obtain funds on the requirement. One advantage of a money order is that it is prepaid. So people prefer money orders more than checks.

They can be used to make payments for small business dues and debts as well. Moreover, money orders can be purchased with a small charge at places like post offices.

3. Petty Cash

It signifies the amount of money that is used for making payments of trivial outlays, and that amount may vary for every organisation. These funds must be kept secured and recorded to prevent thefts.

4. Cash at Bank 

It is the amount of money and other liquefiable assets that are parked with a financial institution. It is a highly liquid asset and can be used to meet several short-term expenditures.

5. Bank Overdrafts

It refers to a situation when a bank balance passes below zero due to excessive withdrawals.

6. Coins

Irrespective of their material, coins that work as a medium between buying and selling are considered as cash.

Now let’s Move on to Cash Equivalents Examples.

1. Commercial Paper

Commercial papers are short-term unsecured debt instruments that are issued by companies. They are mainly used to finance payroll, inventories, payable accounts and various liabilities of short-duration. It comes with a fixed maturity that seldom goes above 270 days.

2. Marketable Securities

These are financial assets that can be quickly converted into cash. These assets are mainly traded on public platforms as they provide ready prices. Furthermore, two types of marketable securities are present: marketable debt securities and marketable equity securities.

3. Money Market Funds (MMF)

Money market funds are the same as checking accounts. But these funds have a high rate of interest accrual on deposited funds. Net Asset Value (NAV) of MMF remains stable in comparison to other mutual funds. For trades, non-profit enterprises, and various other organisations, money market funds are a productive tool for cash management.

4. Short-Duration Government Bonds

Short-term government bond funds are limited mutual funds. They are restricted concerning funding bylaws and investment objectives. That means investment can be only made on short-term liabilities of the government or related agencies.

Cash and cash equivalents in a balance sheet can be reported together or separately. In general, most organisations prefer to show them collectively.

Next, take a look at how to calculate CCE.

Evaluation of Cash and Cash Equivalents

Cash and cash equivalents are reported as current assets on a balance sheet. However, its value changes as different transactions occur. These alterations are termed as ‘cash flows’, and they are noted down on accounting ledger. For example, if a business spends Rs.1000 on buying goods, this is shown as Rs.1000 increase in cash outflow and reduction in cash and cash equivalents value.

Analysts use quite a few formulas to calculate dealings associated with CCE. The first cash and cash equivalents formula:

The second:

However, there are exceptional items that are not considered as cash and cash equivalents. They are – 

1. Credit Collateral

If Treasury bills are given as a mortgage for a loan, it does not fall under the list of cash equivalents. So, restricted T-bills must be shown separately.

2. Inventory

Inventories available in a company’s stock may not be easily convertible into cash. Hence, it is not a cash equivalent.

The above comprehensive discussion related to cash and equivalents meaning is presented by . To learn more concepts associated with Commerce or other subjects, do visit our site.

Our is a developing nation – this is the main characteristic of the Indian Economy. Our Indian Economy is moulded after the Independence in such a manner that it has a blend of both a retarded and a developing economy. 

We must know the basic character that is displayed by the Indian Economy which corresponds with the developing nations. This will help us know our economy at a larger scale and work towards its improvement. In this context, we are presenting our discussion which is based on the Characteristics of the Indian Economy, where we will be discussing the nature or characteristics and know about the dreadful scenario of poverty in India. 

Basic Characteristics of Indian Economy

The Indian economy is a developing economy, and this is owed to the fact that there are extremely high levels of poverty, unemployment, illiteracy, etc. in India. With a suddenly diminishing Gross Domestic Product (GDP) to add to the various problems faced by the Indian economy, there are a lot of factors that contribute to the nature and characteristics of the Indian economy being a developing economy. Let’s understand the characteristic features of developing economies and then understand how these features apply to the Indian economic realm.

Characteristic Features of Developing Economies

A developing economy is one in which the process of development has begun, but it has not affected the whole economy in a full-fledged manner as of yet. The following are some of the characteristic features of developing economies:

The real income of a country refers to the purchasing power of the country as a whole in a given financial year, while the per capita real income refers to the average purchasing power of the country or the purchasing power of an individual in a country in that year. Developing countries share the characteristic of a low per capita real income.

Where there is a high population, there also has to be an infrastructure in place to support that population. This means there need to be enough educational and medical facilities, enough employment opportunities with good salaries, etc. With a high population, especially an increasingly high population, providing these facilities to each citizen becomes a huge task and most often, governments are unable to follow through, thus leaving the economy in the developing stage.

As mentioned before, the appropriate opportunities and facilities are unavailable for the high population in developing countries. Unemployment is a problem that deserves an explanation of its own because a lack of employment leads to a lack of funds for an individual and his or her family to even beget the basic necessities of life.

When institutions have not yet been developed in a country, and there are not enough jobs available for people, they have to turn to what they have been doing for centuries before – primitive primary sector jobs. While these jobs, such as agriculture, are incredibly important in the larger perspective, they do not fetch workers a whole lot of income, nor do they add to the development of an economy to a very large extent.

Vicious Circle of Poverty in India

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The vicious circle of poverty works on both the demand side as well as the supply side. On the demand side, the vicious circle of poverty refers to when the purchasing power (real income) of the country is low, leading to the unaffordability of goods and services. With this comes the supply side, where, since the goods and services aren’t selling, there is a deficiency of capital leading to low rates of investment, and thus a low level of per capita real income. This is how the vicious circle of poverty works and it is rather common to see in developing economies.

Nature and Characteristics of Indian Economy

All the characteristics of a developing economy that we have discussed above hold true for the Indian economy. Let’s take a look at how so with the basic characteristics of the Indian economy condensed into the following pointers:

The population of India as last recorded in the year 2020 is 138 crores (1.38 billion) people and still increasing, putting it only second highest in the world after China. With the world population nearing only 8 billion people, India’s share of the same is a whopping 17 per cent.

Fairly recent statistics of India’s income puts the country’s per capita real income at Rs 1.35 lakh for the year 2019-20. Do realise that the average real incomes of Indian billionaires, as well as those of daily wage labourers, are all averaged here, thus the ballpark figure of 1.35 lakh rupees is not all that accurate.

The prevalence of unemployment and its cousins – underemployment and disguised unemployment are incredibly harmful to the economy. With a huge population with barely any appropriate work available, things have the potential to go very south. This can be attributed to dependence on the primary sector due to the underdevelopment of the tertiary and secondary sectors of the economy. The same factors shove the economy way down into the trenches of the vicious circle of poverty and leave it there.

In today’s financial services the financial institutions are created to provide a wide variety of deposits, lending and deposit procedures are required to be carried out to facilitate the individuals, businesses or the both. Financial Institutions focus on providing the services and accounts for the general public, while others serve specific consumers with specialised offerings.

Financial institutions are developed to appropriate the needs of the society and thus it is important to understand the difference between the types of institutions which will be more appropriate to serve their individual needs.

There are different types of financial institutions from non-banking ones to banking ones and they are as follows: 

• Central banks: These are responsible for overseeing as well as managing all the other banks. No individual consumer has direct contact with a central bank because other big institutions tend to work with the Federal Reserve Bank for providing the general public with various products and services. 

• Retail and commercial banks: These tend to offer products and services like savings accounts, checking accounts, personal loans, mortgage loans, credit cards, etc. 

• Credit unions: A credit union is owned by their members and they tend to operate for their personal benefit. 

• Internet banks: These are further classified as digital banks and neo banks, wherein the former is online-only platforms and the latter are strictly digital native banks, holding no affiliation with any other bank but themselves. 

• Investment banks and companies: These are known to help individuals and businesses to raise their capital through the issuance of securities. 

• Savings and loan associations: Individuals take the help of savings and loan associations for mortgage lending, personal loans, and deposit accounts. And these financial institutions don’t lend more than 20% when it comes to businesses. 

• Brokerage firms: This helps both businesses as well as individuals to buy and sell securities if there are any available investors. 

• Insurance companies: An insurance company is one that helps out an individual to transfer the risk of loss. 

• Mortgage companies: Most mortgage companies are focused on serving the individual consumer market. However, there are a chosen few whose lending options are specialised in commercial real estate only.

The Difference Between a Bank and a Financial Institution 

Commercial Bank

Banks, more precisely termed as retail or the commercial banks, fall under the category known as the banking financial institutions. A bank is actually a financial intermediary, they act as a middleman between the suppliers of funds or the depositors and the borrowers. The major task of the bank is to accept the deposits and use the funds which will later on to offer loans to the customers. Yet another duty of a bank is to act as a payment agent, that is done by offering a payment. A bank makes money by investing the deposits in the financial securities and assets, but they mostly make money by lending the funds further to its customers. The primary reasons that the public deposits the money in banks are for convenience, safety and to gain interest income.

Financial Institutions

While financial institutions include all the categories of banks – banks, investment banks, insurance companies, investment funds and other categories of money sector corporates. Except for banks, all are known as non-banking financial institutions who provide financial services to the public but that differs from those of a bank. 

The main difference between other financial institutions and banks is that other financial institutions cannot accept deposits into savings and demand deposit accounts, while the same is the core business for banks.

Advantages of a Commercial Bank

The Advantages of Commercial Banks are as follows:

 

1. Location

The commercial banks are large companies thus, these companies are to be found all over the town, state or country. Some of these commercial banks have businesses in other foreign countries as well and hence their location facilitates the people. Commercial banks are literally located anywhere even inside of malls or retail stores, the ability to access money and account information can be done from almost any location.

2. Discounts

Commercial banks also serve the customers with low prices. Like wholesale companies, the commercial banks buy in bulk and sell to the public at a discount. These discounts may offer free checking, no fees while opening savings or checking accounts. They also provide the customers with low interest rates on real estate loans.

3. Product Offerings

Commercial banks offer more products and service offerings. Commercial banks offer every banking service which a small banking company would offer also CDs, investment accounts, commercial real estate loans, even mortgage plans and the option to have a debit card, credit card or both.

4. Online Banking

With the increasing growth of technology, commercial banks also offer their services online. Customers can keep track of their checking and savings accounts, transfer money to either of their accounts, also pay bills or apply for a loan over the internet itself. 

5. Electronic Banking

By using the 24-hour ATMs, customers can withdraw or deposit money and also can access their account information or transfer their funds.

Limitations of Financial Services 

The limitations with these financial institutions are as follows:

• Restriction on dividend payment which is imposed on the powers of the borrowing capacity of financial institutions.

• These institutions come under the government criteria hence, they follow rigid rules for granting these loans. 

• Too many formalities are attached which is indeed time consuming. 

• Financial institutions have their nominees on the Board of Directors of the borrowing company thereby restricting the powers of the company to borrow funds.

The term business is associated with manufacturing and distribution of goods as well as services for earning profits. It fundamentally refers to the economic activities that are carried out by individuals and organisations for the purpose of generating incomes. According to some of the definitions business is a human activity that is focused on the creation of wealth through the process of buying and selling of services. According to other definitions the business is termed as the form of economic activities targeted at earning income. We take a look at concepts and characteristics associated with business.

(Image to be added soon)

The above picture shows that there are several characteristics of business depending from one organisation to another. However, the motive is the same, that is, to satisfy the particular needs of customers. 

The Concept of Business

The term business is derived from the word “busyness” and it means being engaged in any specific activity. The business process generally involves purchasing something at lower prices and selling it at higher prices. The margin that is generated between low cost price and high selling price is termed as profit. The fundamental objective of any business is to accrue profit.

The business usually refers to an occupation which involves certain activities that are linked with the manufacturing or acquisition of goods for sale. It also refers to the addition of profit margin for selling it to clients for satisfying their requirements. While the business is focused on generating profit, it is also associated with satisfying the requirements of the customers. 

The Characteristics of Business

The characteristics are the important features that are necessary for classifying the business. Some of these characteristics include Government control, change, globalisation, competition, information etc. We will have a brief look at some of the characteristics associated with business. 

If a business plans on selling a product or goods, then it has to either manufacture or purchase that product. This helps in adding profit margin to the services or goods provided by the business. Some of the services associated with sales are transportation, security, and housekeeping. 

One of the crucial characteristics associated with business is economic activity. Any economy that provides fiscal return refers to economic activity. These activities are primarily concerned with production or distribution of goods and services.

 

Business is an important commercial activity which generates money. Just a single transaction related to purchase or sale cannot be a business activity. Apart from regulations, the business should be continuous in terms of its dealings. The major business organisation features determine that businesses should continuously manufacture and sell products for gaining profits. 

After the procurement or production, the other features associated with business are selling services or goods for money. The product or service can be sold by introduction in the market or through the offer of sale.

The fundamental goal of any business is earning profits. If any business can’t generate profit then it will be considered a failure. This is why individuals and business organisations try all possible methods for earning profits through improving sales volume or the decrease of costs.

Any business has its own set of risks, and the more the risks are involved, the higher is the potential return. When someone is starting a new business, it is never certain if the business would be successful or not. The new business might earn profit but the amount or quantity of profit that is gained might vary.

By the concept and nature of business, every business should be legal and lawful. The regulation of a nation mandates putting clauses on the business operations for controlling its activities. Business can be owned by a group of individuals or a single person. Profit is one of the fundamental parts of business. The activities associated with manufacturing and distribution of goods as well as services are supported for making a profit.

Consumer’s real purchasing power with which he can buy a combination of two goods, given their prices is known as the Consumer’s Budget. A consumer has limited income therefore the consumer’s budget shows the number of goods and services he can afford.

Let’s take an example, suppose, the income of a consumer is fixed and with that income, he can afford only two things. The prices for both the things in the market are fixed, therefore the consumer will try to choose the best combination of the goods that he wants to buy. He would look for the things that would yield him utility more than the price he has paid, this would give him maximum satisfaction. 

The consumer budget includes two things: a budget set and a budget line.

Budget Set

The attainable combination of a set of products when the consumer has a fixed income, given the prices of products. Therefore, the two utmost factors that affect the choice of the consumer while purchasing a quantity are the consumer’s income and the price of the quantity. The total expenditure that is incurred while purchasing a good or service is the price times quantity for each. Therefore, if the consumer is buying two goods, the expenditure spent on them must be less than or equal to the income of the consumer. This is known as the budget constraint that a customer faces. The mathematical equation for a budget set it-

where P₁ = Price of good 1

P₂ = Price of good 2

X₁ = Quantity of good 1

X₂ = Quantity of good 2

M = total budget or total expenditure

The bundles satisfying the criterion set to form a part of the budget set and the consumer can choose out of any of these bundles which one to consume.

Provided a fixed income, the consumer budget leaves customers with the only choice of deciding the quantity of their purchase. Given they can purchase only two commodities, two aspects influence a customer’s inclination towards the number of units to purchase from both commodities: his/her money income and price of each item.

The total cost incurred in purchasing a commodity is known by multiplying the price (P_n) of each unit with their quantity of purchase (Q_n). For two commodities, the total expenditure can be calculated by adding the aforementioned products for both goods. This sum must be less than or equal to the consumer’s money income (M). This is referred to as the budget restraint that a consumer faces and is represented as:

P₁.X₁ + P₂.X₂ <= M – equation (i)

[Where, 

P₁ represents the price of product 1

X₁ stands for the quantity of product 1

P₂ represents the price of product 2

X₂ stands for the quantity of product 2

M is the total monetary earning of a consumer]

These combinations of bundles that a consumer can afford to purchase according to his/her income and item prices, collectively constitute the budget set.

What is the Budget Line in Economics?

Now if we slightly modify the equation mentioned earlier to make total expenses equivalent to total income, and plot the same on a graph, it will present us with a budget line.

The budget line is a graphical representation of all such combinations of two commodities that a customer can afford according to his/her earnings and given market prices in such a manner that the total expenditure on these combinations is exactly equal to the money income of the consumer.

Following is a representation of a budget line in the equation.

P₁.X₁ + P₂.X₂ = M

Where the letters represent the same values as that in equation (i).

Refer to the image provided below for a graphical representation of a budget line.

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Here, the quantity of product 1 (X) has been represented on the x-axis, while the quantity of product 2 (Y) has been represented on the y-axis.

The horizontal intercept of the graph represents the ratio of consumer’s income to cost of product 1 at Y = 0, that is the customer does not buy product 2. It can be calculated as:

x-intercept = M / P₁

Vertical intercept of the graph represents the ratio of consumer’s income to cost of product 2 at X = 0, that is the customer does not buy product 1. It can be calculated as:

y-intercept = M / P₂

Point K inside the budget line stands for a feasible bundle which is a part of a given budget set and forms expenses less than total money earnings of the consumer. Point H, on the other hand, represents a bundle that is not included in the provided budget set and is, therefore, more expensive than total income.

Example of Budget Line

Look at a practical example in order to understand the function of the budget set and budget line better.

Shalini wants to buy T-shirts and go to the movies. Movie tickets cost Rs. 7 per piece and each T-shirt comes at Rs. 14. She can spend a total of Rs. 56 on them. She has to plan her expenditure in a way that she can avail maximum benefit from a limited income.

Following is a table planning out all possible combinations of bundles within given income.

Refer to the graph provided below to understand how a budget line can be plotted with the prepared table of budget sets.

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Here, the horizontal axis represents the quantity of T-shirts and the vertical axis represents the quantity of movie tickets. This budget line denotes the affordability margin of a consumer and all points inside and on this line represent budget sets of two items less than and equal to total money income respectively.

When all the bundles which mean the combinations of good 1 and good 2 cost the consumer exactly his income, this line is known as the budget line, sometimes, price line.

P₁X₁ + P₂X₂ = M

where P₁ = Price of good 1

P₂ = Price of good 2

X₁ = Quantity of good 1

X₂ = Quantity of good 2

M = total budget or total expenditure

John has Rs. 50 to buy chocolate. He only has a few options to allocate his income so that he can receive maximum utility from the limited salary. 

The idea of a budget is extremely crucial while managing expenses, be it in a large economy or a simple household. It gives a clear picture of what to buy and how much to buy within a given income.

In this section, you will study about consumer budget, what is budget set, and budget line in Economics. Read on to find detailed explanations on these topics with examples.

Properties of the Budget Line

Some salient features of a budget line have been listed below.

• Straight Line: Budget line comes with a straight line which implies the sustained rate of market exchange for each set of bundles.

• Real Income Line: This line is representative of the total income and expenditure power of a consumer.

• Negative or Downward Slope: Graphs of budget lines have a downward slope which points to an inverse proportionality between purchases of two given commodities.

• Tangent to Indifference Curve: Budget line acts as a tangent to the indifference curve at a point which can be referred to as consumer’s equilibrium.

Requirements of a Budget Line

The theory of the budget line is mostly based on assumptions, like a majority of economic theories, in order to bring out simpler and clearer analytic results. Some of them are mentioned below:

• Revenue of a consumer is spent on the purchase of two commodities only.

• Total money earning of a consumer is limited and known.

• The consumer knows the market prices of both products.

• The entire income of a consumer is equal to his/her total expenditure.

Consumer budget and Budget Line is a crucial topic in CBSE Class 12 Commerce and comes with multiple complex concepts from which students may need to attempt questions in their board exams. Stay ahead of the crowd with a Budget Line in Economics PDF available on ’s website. For more information on such topics, download our app today.

Controlling is the process of assessing and modifying performance to ensure that the company’s objectives and plans for achieving them are met.

Control is the final role of management. The controlling function will become obsolete if other management functions are properly carried out. If there are any problems in the planning or actual performance, control will be required.

Controlling ensures that the proper actions are taken at the appropriate times. Control can be thought of as a process through which management ensures that the actual operations follow the plans.

The company’s managers check the progress and compare it to the intended system through managing. If the planned and real processes do not follow the same path, the necessary corrective action can be implemented.

The control process is the careful collection of information about a system, process, person, or group of people which is required to make necessary decisions about each of the departments in the process. Managers in the company set up the control systems which consist of the four prior key steps which we will discuss in the later section. 

The performance of the management control function is important for the success of an organization. Management is required to execute a series of steps to ensure that the plans are carried out accordingly. The steps that are executed in the control process can be followed for almost any application, also for improving the product quality, reduction of wastage, and increasing sales.

What is Controlling?

The Controlling process assures the management that the performance rate does not deviate from its standards. 

The controlling Process consists of five steps: 

1. Setting the standards.

2. Measuring the performance.

3. Comparing the performance to the set standards 

4. Determining the reasons for any such deviations which is required to be paid heed to. 

5. Take corrective action as required. Correction can be made in regards to changing the standards by setting them higher or lower or identifying new or additional standards in the department. 

Elements and Steps of Control Process

1. Establishing Performance Measuring Standards and Methods

Standards are, by definition, nothing more than performance criteria. They are the predetermined moments in a planning program where performance is measured so that managers may receive indications about how things are doing and so avoid having to monitor every stage of the plan’s execution.

This simply means setting up the target which needs to be achieved to meet the organizational goals. These standards set the criteria for checking performance. The control standards are required in this case. 

Standard elements are especially useful for control since they help develop properly defined, measurable objectives.

2. Measuring the Performance

Performance against standards should be measured on a forward-looking basis so that deviations can be discovered and avoided before they happen. Appraising actual or predicted performance is relatively simple if criteria are properly drawn and methods for determining exactly what subordinates are doing are available.

The actual performance of the employee is then measured against the set standards. With the increase in levels of management, the measurement of performance becomes quite difficult.

3. Determining if the Performance is up to par with the Standard

In the control process, determining if performance meets the standard is a simple but crucial step. It entails comparing the measured results to previously established norms. Managers may assume that “all is under control” if performance meets the benchmark.

Comparing the degree of difference between the actual performance and the set standard.

4. Developing and Implementing a Corrective Action Plan

This phase becomes essential if performance falls short of expectations and the analysis reveals that corrective action is required. The remedial measure could include a change in one or more of the organization’s functions.

This is being initiated by the manager who corrects any sorts of defects in the actual performance.

Types of Control

There are five different types of control:

1. Feedback Control: This process involves collecting the information on which the task is being finished, then assessing that information and improvising the same tasks in the future.

2. Concurrent control (also known as real-time control): It investigates and corrects any problems before any losses arising. An example is a control chart. 

This is the real-time control, which checks any problem and examines the same to take action before any loss has been caused. 

3. Predictive/ feedforward control: This type of control assists in the early detection of problems. As a result, proactive efforts can be done to avoid a situation like this in the future. Predictive control foresees the problem ahead of its occurrence. 

4. Behavioral control: This is a direct assessment of managerial and staff decision-making rather than the consequences of those decisions. Behavioral control, for example, sets incentives for a wide range of criteria in a balanced scorecard.

5. Financial and non-financial controls: Financial controls refer to how a firm manages its costs and spending to stay within budgetary limits. Non-financial controls refer to how a company manages its costs and expenses to stay within budgetary constraints.

Features of Controlling

The features of controlling are discussed point-wise to give a clear insight into the concept. The features are as follows:

• The controlling process motivates the employees and boosts the employee morale, eventually, they strive and work hard in the organization.

Advantages of Controlling

The organization inculcates the process of controlling due to its undying advantages. The advantages of control are as follows:

In contrast to this, controlling suffers from the disadvantage that the organization has no control over the external factors that also affect the organization. The controlling Process becomes a costly affair, especially for small companies.