Category: Commerce Notes PPT

An audit is a process of an analytical system of accounting and internal control. It is independent scrutiny of the financial information of a business entity. It provides trustworthiness of the financial statements of an organization/ company and gives confidence to the shareholders of the company that the accounts are true and fair. 

Bank Branch Audit

Auditing of a bank is conducted as per the Banking Regulations Act, 1949. Bank branches are audited almost every year to investigate the affairs of the same. It is an inspection and examination of the books of accounts of a branch of a Bank. Such audits help the branch to maintain proper books of accounts. There are three types of bank audits. They are (1) Internal audit, (2) Concurrent audit, and (3) statutory audit.

Bank Branch Audit Planning

Before taking up an audit, audit planning is an important aspect to evolve a general strategy and a detailed approach for expected nature, timing, and extent of the audit. It is planned by the auditors to perform the audit efficiently and within the stipulated time frame for completion of the same.

Bank Branch Audit Checklist

The following is the checklist to be taken care of, before the start of a bank branch audit.

1. Pre-audit Work- Auditors will have to review the latest available inspection reports of the branch and their compliance thereof. They will also look into the circulars issued by the head office of the bank and also look into the bank’s accounting policies, compliance of mandatory accounting standards and RBI guidelines.

2. Physical Verification- Auditors will have to verify cash in the branch and also an ATM. They have to verify adhesive stamps, postages and valuable stationeries like cheque books, etc.

3. Auditors have to verify Returns and reconciliation statements submitted to the branch controlling offices and RBI.

4. They have to verify the profit & loss account and balance sheet figures with General Ledger figures.

5. With regard to advances/ loans sanctioned, auditors have to verify sanctioning of the same, documentation, monitoring, and supervision by the branch. Adding, suit-filed accounts are taken into consideration to verify the accounts classified as non-performing assets and they are followed up.

6. With regard to Deposit accounts, they have to verify whether there is any unusual large movement of aggregate deposits between the date of balance sheet and till the date of auditing.

7. With regard to Profit & Loss account, auditors have to verify various aspects of the provision of interest on standard, substandard and doubtful assets. They have to do test checking of interest on deposits and advances; also, to verify the correctness of various income and expenditure accounts.

8. Auditors have to check items as per the LFAR (Long Form Audit Report) checklist. 

9. Auditors to prepare the final report of the audit undertaken in the bank branch.

Branch Audit Report Format

Auditors are responsible for providing information on issues given in Long Form Audit Report, i.e., LFAR. It is an important measure available for auditors by which they can comment on the balance sheet, Profit & Loss account, prudential norms, process lapses in operation and other issues relating to statutory audit of the branch.

Bank Branch Audit Procedures and Guidelines

Banks have the responsibility of conducting a preliminary check of all accounts in a bank branch. So, an auditor is required to review the documents like the latest audited financial statements, projected Profit & Loss Account, Balance Sheet and Cash Flow Statement. They have to check advances/ loans given to borrowers and whether they have been disbursed as per the terms and conditions of sanction. They have to verify for Non-Performing Assets (NPA).

After thoroughly checking all the accounts and the laid down procedures, the auditors have to submit an audit report.

The fundamental problem in economics is the issue with the scarcity of resources but unlimited wants. Economics has also pointed out that a man’s needs cannot be fulfilled. The more our needs are fulfilled, the more wants we develop with time. By definition, scarcity implies a limited quantity of resources. As a result of scarcity, there is constant opportunity cost. Opportunity cost means that if you use your resources to consume a particular good, you cannot consume any other good with the given resource. Therefore, economists are concerned with dealing with the optimum allocation of resources in society to make the usage of these resources efficient as well as practical. 

Introduction to Basic Problems of an Economy

1. What to Produce? 

Ans: No country can produce all the goods because there are limited resources available to them. Therefore, a choice has to be made between the different types of commodities that a country can produce with its available resources. For instance, a farmer who has a piece of land can produce either wheat or rice. Similarly, the government of a country needs to decide where to allocate its resources whether in consumer goods or defence goods or both, if both, then what will be the proportion of allocation of resources in the two categories of goods.

2. How to Produce?

Ans: This economic problem is concerned with the technique of producing a commodity. This problem arises only when there is more than one way of manufacturing goods. The techniques of production can be classified into two broad categories:

Labour intensive technique is known to promote employment, whereas capital intensive techniques promote growth and efficiency in manufacturing.

3. For whom to Produce?

Ans: All wants of people in a society can not be satisfied. So, a decision has to be made on who should get the amount of total output of goods and services produced. Society decides on the amount of luxury and standard goods that have to be produced. The further distribution of these goods directly relates to the purchasing power of the economy. 

4. How Market Mechanisms Solve the Basic Problems of an Economy?

Ans: All the three kind of economies, Capitalistic economy, Socialistic economy and Mixed economy, solve the basic problems of an economy in two methods:

The Basic Problem of an Economy and Free Price Mechanism

A system of guiding the decisions of individuals within an economy through the price which is determined with the help of market forces of demand and supply is called price mechanism. This system is free of any government intervention. When the market equilibrium is reached by market forces of demand and supply, i.e. the quantity supplied becomes equal to the quantity demanded, then the price of a commodity is determined. Price mechanism also facilitates the determination of resource allocation, consumption and production as well as determining the level of savings and factor income. This method mostly takes place in a capitalistic economy.

The Basic Problem of an Economy and State Intervention System

This system is defined by administering the fixed prices of every commodity. In a socialist economy, the government plays a vital role in determining the price of commodities. Ceiling price or floor price may be introduced by the government to regulate the prices of certain commodities.

Explain Briefly the Basic Economic Problem of an Economy in India

In India, the basic economic problems are

• What to produce?

• For whom to produce?

• How to produce?

Starting in the early 1950s, India adopted a system of a mixed economy. The basic problem of economics is solved with the help of a mixed economy in India. A Mixed economy is a system where the private and public sectors co-exist. In other words, a mixed economy is a blend of a capitalist and socialist economy. In mixed economies, all the economic problems are solved with the help of free as well as controlled price mechanisms. 

Did you know?

1. Singapore is the most unique economy. Singapore’s economic success can’t be explained by one single economic theory. It is the greatest example of combining extreme features of capitalism and socialism for a successful economy. 

2. Economics was called “political economy” before the beginning of the 20th century

Protecting the environment is an inevitable part of Business Ethics. Nowadays we see big business houses plant trees on the roadside and write their respective organization’s name. Why do they do so? This all comes in part of CSR. Doing that gives them recognition from the locals, which will help them earn goodwill for protecting and contributing to the environment’s gradation.

Our discussion is thus based on this topic of Business Ethics which protects the environment. The discussion is very crucial. We shall strengthen our knowledge on the role of business while protecting the environment.

Ideas to Protect Environment: Business Methods

The environment is over and above all when we depend on our living. From the trees that provide us oxygen to the land we live upon and the water bodies that provide us with water, the environment is fundamental for the society and the businesses to function. We all have the responsibility to conserve and protect this environment, whether it is the government, businesses, consumers, workers or other members of the society, all should mutually contribute to prevent the environment from further pollution.

Governments must initiate environmental saving programs to ban the use of hazardous products like plastic carry bags. Consumers, workers and society are required to support environmental protection by not using hazardous products or other products which are not environment friendly.

Steps taken by Business Enterprises

Business enterprises need to take the lead in solving the environmental issues. It is the responsibility of the business owners to check the consequences of their actions which requires them to protect environmental resources. Some initiatives which need to be taken by the business enterprises for environmental protection are:

• A sincere commitment needs to be committed by the top management of the business to cultivate, maintain and develop the work culture for environmental protection and for pollution prevention.

• To ensure that the commitment towards environmental protection is shared equally by all the employees in the organization throughout all the divisions of the business.

• Developing policies that clearly define programmes in order to save the environment which includes disposal and waste management strategies.

• To adapt to the environmental laws and regulations which are passed by the government for the prevention of pollution.

• Participation in the government programmes which relates to the management of hazardous substances which clears up the polluted water bodies, initiates plantation of trees and to reduce the effect of deforestation.

• Assessment of the pollution control programmes in terms of costs and benefits to increase their progress if included in the business policy.

• Also, businesses can arrange workshops where training is given and technical information is being shared along with the experience to get the customers and the suppliers involved in the pollution control programmes.

• Promoting green energy which reduces the use of fossil fuels.

Importance of Commerce in Saving the Environment

It was a length of time, when commerce was committed to sustainable development of the environment, constantly adapting to the new production and consumption patterns to minimise the environmental impact to put environmentally friendly products on shelves over hazardous products. 

In the European nations, the companies are affected by climate change, scarcity of natural resources, waste mountains, deforestation and potentially hazardous chemicals in consumer goods. These concerns drove changes in lifestyles and affected the purchasing decisions of the consumers, which led to changes in the whole supply chain. 

Commerce is ever keen to anticipate and to respond to the consumer demand, working to cut emissions, recover and recycle waste and reduce the overall environmental impact, while still offering the range of choice and affordability with the consumption products. 

The commerce sector – retailers, wholesalers and international traders – are already taking action, not only to meet the legislation, but to go beyond what is legally required, to save the environment.

Major Role in Increasing Sustainability

Commerce is committed to sustainability of the natural resources. Due to our strategic position in the supply chain, we can play a major role in the drive towards increasing this sustainability, a role we value the prior. We can encourage: 

• The use of energy efficient in-store material 

• Optimisation of the logistics fleet to reduce the emission of CO2 emissions 

• Communicate to the customers on the environmental impact for hazardous products

• Providing information on the potentiality of saving energy-efficient products.

Utility is a physiological fact that implies the wanting the satisfying power of a good or service. It differs from person to person, as it relies on a person’s mental attitude. The measurability of utility is always a controversial subject. The two primary theories for utility are Ordinal Utility and Cardinal Utility. Many traditional economists proposed a view that utility is measured quantitatively like length, height, weight, temperature, etc. This concept is termed a Cardinal Utility. On the other hand, Ordinal Utility expresses the utility of a commodity in terms of more than or less than. Read the article below to understand the difference between Cardinal Utility and Ordinal Utility. 

What is an Ordinal Utility?

Ordinal Utility states that the satisfaction a consumer gets after consuming a good or service cannot be scaled in numbers, whereas, these things can be arranged in the order of preference. Two English economists, John Hicks and R.J. Allen 1930 argued that the consumer behavior theory should be introduced based on Ordinal Utility. According to the ordinal approach, utility is a psychological phenomenon like happiness, satisfaction, and welfare. The ordinal theory is highly subjective and differs across individuals. Therefore, it cannot be measured in quantifiable terms.

The function that represents utility of a product according to its preference, but does not provide any numerical figure, is known as an Ordinal Utility. In simpler words, this theory affirms that it is relevant to ask which item is better as compared to others instead of how good is that product. For example, a BMW car is favored more than a Toyota car, but it cannot be determined by what percentage.

Apart from showing a mathematical function, a consumer’s preference can be demonstrated graphically through indifference curves. It becomes easy when there are two types of commodities x and y. Each indifference curve provides coordinates (x,y) when (x1, y1) and (x2, y2) lie on the same curve line and (x1, y1) ~ (x2, y2).

This is an example of an indifference curve map where the preference of goods are shown but not their quantity. Each of the curves represents a combination of two services or goods. The consumers are equally satisfied with the goods and services. The more distant a curve is from the origin, the higher its utility level.

The utility according to this approach can be measured in relative terms such as less than and greater than. This approach states that consumer behavior can be explained in terms of preferences or rankings. For example, a consumer may prefer soft drinks over hard drinks. In such a case, the soft drink would have 1st rank, while 2nd rank would be given to hard drinks

Therefore, as per the Ordinal Utility approach, a consumer observes different pairs of two commodities which would provide him/her the same level of satisfaction. Among these pairs, he/she may prefer one commodity over the other based on how he/she ranks them in order of utility. This implies that utility can be ranked qualitatively rather than quantitatively.

Do you know: In 1934 John Hicks and Roy Allen produced the first paper which declared Ordinal Utility.

What is Cardinal Utility?

According to classical economists, utility is a quantitative concept that can be measured in terms of a number. Hence they introduced the concept of measuring utility using a cardinal approach. According to this concept, the utility can be expressed similarly to how weight and height are expressed. However, the economists lacked a precise unit for utility. Hence, they derived a psychological unit termed as ‘Util’. Util is not regarded as a standard unit because it varies from person to person, place to place, and time to time. For example, if a person assigns 30 utils to a pizza and 20 utils to a chowmein, we can understand that the pizza has double the capacity to satisfy what humans want.

As util is not a standard unit for measuring utility, many economists, including Alfred Marshall suggested measurement of utility in terms of money that consumers are willing to pay for a commodity. If each rupee is equal to 1 util, a pizza worth Rs 30 has 30 utils and a chow min worth Rs 20 has 20 utils. Hence, the consumer who consumes burgers will yield utility of 30 utils and those who consume chow min will yield utility of 20 utils.

The supply and demand of a product decide its price. Moreover, a person’s desire for a product depends on these three factors:

Application of Cardinal Utility

Following are the different applications of Cardinal Utility: 

Welfare Economics: Under this structure, the production of goods and providing services are judged by the personal wealth of an individual. This means that it presents a way to comprehend the “greatest good to the greatest number of persons”. For example, by this act, a person’s utility decreases by 75 utils and increases two other persons each by 50 utils. However, the overall increase is 25 utils which is a positive offering.

Marginalism: In cardinal theory, a product’s marginal utility sign is alike for all the mathematical forms, but its magnitude is not the same. This applies to the second derivative of a differentiable utility as well.

Expected Utility Theory: This framework works for settlements that are to be made under risks. Suppose there are a few lottery tickets that will provide outcomes. Here, it is possible to plot preferences in real numbers so that numerical representation can be done.

Intertemporal Utility: In various representations of utility, where people deduct the upcoming values of utility, cardinality comes into play. With the use of this, it is feasible to generate proper utility functions.

Differentiate between Cardinal and Ordinal Utility in Tabular Form

Key Difference between Cardinal Utility and Ordinal Utility:

• Cardinal Utility is a utility that determines the satisfaction of a commodity used by an individual and can be supported with a numeric value. On the other hand, Ordinal Utility defines that satisfaction of user goods can be ranked in order of preference but cannot be evaluated numerically.

• The measuring term for cardinal and Ordinal Utility is utils and ranks respectively. Utils is the unit of utility and ranks determine the preference of a product compared to other products in the market.

• Ordinal Utility measures the utility of goods subjectively, but Cardinal Utility evaluates objectively.

• Cardinal Utility is not much realistic as compared to the Ordinal Utility as quantitative evaluation of utility is not practicable. Ordinal Utility depends on qualitative measurement, which makes it more realistic.

• Another difference between ordinal and Cardinal Utility is that the former one is based on indifference curve analysis, and the latter is based on marginal utility evaluation.

• Alfred Marshall and his admirers presented the Cardinal Utility approach, and Hicks and Allen pioneered the Ordinal Utility idea.

Another point that can be considered as a difference between cardinal and Ordinal Utility is that ordinal evaluation is sure to give outcomes. The Ordinal Utility is preferred more because it provides more robust results. Conversely, the concept of Cardinal Utility is obsolete, but still, it is used for contexts like discounted utilities, making settlements under risk and utilitarian welfare calculations.

Conclusion

Cardinal and Ordinal Utility are two important theories of utility. Cardinal Utility provides a value of utility to different alternatives. In other words, it enables consumers to rank the magnitude of how much they prefer one good over another. On the other hand, Ordinal Utility ranks in the order of preference. The Ordinal Utility does not permit consumers to rank the magnitude of how much they prefer one good over another.

To have a better understanding of cardinal vs Ordinal Utility, you can learn more concepts on and can take part in the online classes that we have to offer.

The change signifies an increase or reduction in the demand and supply volume from the equilibrium. Besides the price of the product, other factors exist that determine the changes in quantity demanded. These factors are changes in the taste and preferences of the consumers, population, income changes, technologies, and more. Even climatic change can result in a change in demand for a particular product. Owing to the influence of these determinants, there is a Change in Demand and supply of a commodity. Hence, the supply curve shifts so do the demand curve. Now, we will discuss in detail the Change in demand definition.

Changes in Demand

If the product’s price is constant and the other factors are variable, then shifting of the demand curve is possible in the rightward or leftward direction. It depicts the Change in Demand, therefore the movement is not restricted along the single demand curve. The move is possible for a higher or lower demand curve. In the above figure, when Demand increases, the demand curve shifts rightward from [D^{2}D^{2}] to [D^{3}D^{3}], and when demand decreases, the demand curve shifts leftward from [D^{2}D^{2}] to [D^{1}D^{1}]. Hence, understanding the concept of demand change is vital.

In the above graph, we can see that there is a shift from [D to D^{1}] indicating a fall in demand at the same market price. We can also see a shift from [D to D^{2}], indicating a rise in demand at the same price. 

Reasons for the Change in Demand

The main reasons for the Change in Demand or for shifting of the demand curve are: 

1. Changes in the Income of the Consumer 

When the cost of a good remains constant, the demand for that good increases (decreases) if the cost of the substitute goods increases (decreases). As a consequence, the demand curve moves to the right or left.

2. Changes in the Prices of Substitute Goods

To be more precise with what causes a change in demand, we can explain this one. When the rate of goods is constant, the demand for the good increases (decreases) if the number of its complementary goods decreases (increases). As a result, the demand curve shifts to the right or left.

3. Changes in the Prices of Complementary Goods

Following the guidelines of the Change in Demand definition, we can say when the price of a good remains constant if the costs of its corresponding goods decrease (increases), the demand for the good increases (decreases). Resultantly, the demand curve shifts to the right or the left. This concept typically explains the Change in demand examples.

4. Changes in the Taste and Preferences and of the Consumers 

When the price of commodities remains constant if taste and preferences on that good increase (decreases), the demand for that item also increases (decreases). Therefore, the demand curve shifts to the right or the left.

Precisely, these were the chief determinants of the Change in demand factors that influence the Change in demand curves.

Considering all the factors of what causes a change in demand, we can conclude that, the demand curve shifts to the right when, 

• The income of the consumer increases

• Cost of the substitute goods increases 

• Prices of the complementary goods decreases

• Taste and preferences of the consumers increases

Conversely, the demand curve moves to the left when

• The income of the consumer’s decreases

• Prices of the substitute goods decreases 

• Estimates of the complementary goods increases

• Taste and preferences decreases 

Reason for Decrease in Demand

What is the reason for the decrease in demand?

• Overall the price decreases, but the equilibrium in quantity increases.

• Overall price decreases and equilibrium in quantity reduces.

• The overall price stays the same, but the equilibrium quantity decreases.

According to the Change in demand definition, when there is a reduced demand with a provided supply curve, the market supply gets excess. Due to the excessive quantity, the price of a particular commodity also falls. Therefore, the right answer to this question is the third one: The overall cost stays the same, but equilibrium in quantity decreases.  

What is Demand?

Demand refers to the quantities of commodities that the consumers are able to buy at each possible price during a given period of time other things being equal. It is the ability and willingness to buy a specific quantity of a good at alternative prices in a given time period.

The determinants of demand are as follows:

• Price of commodity

• Price of related commodities

• Level of income of the household

• Taste and preferences of consumers

The above-mentioned factors are also responsible for the change in demand. Let’s discuss these points in detail below:-

1. Substitute Goods are those goods that the consumers can use in place of other goods and provide the same level of satisfaction. Here if the price of substitute goods rises then the demand for the given commodity also increases and vice versa.

2. Complementary Goods are those goods that are demanded jointly as the other goods or are useless in the absence of the other goods. Here the rise in the price of the complementary goods results in the decrease in demand for the given commodity. 

• Level of Income of the Household- level of income affects demand. When there is an increase in income it will result in increased demand for normal goods. In the case of inferior goods, the rise in income will result in a decrease in demand for the inferior goods.

• Taste Preferences of Consumers- there are various factors for the change of preferences of the consumers. For example, the demand for umbrellas during the rainy season will be higher than on a sunny day. Therefore, the change in demand occurs according to the taste and preferences of the consumers which are determined by various factors.

The Closing Stock or the closing inventory Formula is Opening Stock + Purchases – Cost of Goods Sold.

 

We need to add the cost of beginning inventory or the opening inventory to the cost of purchases during the period. This is the cost of goods which will be available for sale. Then, multiply the gross profit percentage by the sales to find the required cost of goods sold. After this, subtract the cost of goods available for sale from the cost of goods sold to get the ending or the closing inventory.

 

This Closing Stock is an amount of the unsold stock that is lying in your business on a given date. In simple words, it’s the inventory that is still lying in your business. This closing stock is to be sold for a given period. The closing stock can be in various forms – raw materials, work-in-progress (WIP), or in the form of finished goods.

 

Closing Stock – Description 

As mentioned earlier, Closing Stock is an amount of unsold stock that is lying in a business on a particular date. This inventory is to be sold by the business at a destined period of time. 

 

Closing stock is the amount of inventory that a business has on hand at the end of an accounting year. The amount of closing stock is to be ascertained by physically counting the inventory. This can also be determined by the perpetual inventory system to arrive at the end record of the number of closing stock or inventory.

 

There are Ways to Calculate the Recorded Value of the Closing Stock, Including:

• First in, first-out method

• Last in, first-out method

• Retail Inventory method

• Weighted average method.

 

Closing Stock in Balance Sheet 

Closing Stock is represented on the Asset Side of the Balance Sheet. Then, this is adjusted with the purchases amount which may be taken to the debit side of the Trading Account and the Closing Stock appears on the Asset side of the Balance Sheet.

 

Sometimes in the Trial Balance, this adjusted purchase is given and this means that the Opening Stock and Closing Stock are adjusted through this purchase. Then both these Adjusted Purchases A/c and the Closing Stock Account appear in the Trial Balance.

 

Valuation of Closing Stock 

To calculate the closing inventory, the new purchases are added to the ending inventory, then minus the cost of goods sold is done. This helps to find out the final value of the inventory at the end of the accounting period.

 

The ending inventory is dependent on the market value or the lowest value of the goods that the business possesses in itself.

 

The most obvious way to calculate the closing inventory is by doing a physical count at the end of each month and then to value the inventory using a valuation method like the LIFO, FIFO, and the Weighted Average Method.

 

Generally, it’s not practical to carry out the physical count. Hence an estimation method is used for calculating this closing inventory.

• Gross Profit Method

• Retail Method

 

Using Gross Profit Method

We use the following steps to calculate the closing inventory by the gross profit method:

1. Add the cost of the beginning or opening inventory to the cost of purchases during the period. This will be the cost of goods that are available for sale.

2. We then Multiply the gross profit percentage by the number of sales to find the estimated cost of the goods sold.

3. Then subtract the cost of goods available for sale from the cost of goods sold to get the ending or the closing inventory.

 

Using Retail Method

This method is commonly used by retailers to calculate the ending inventory. This method uses the proportion of the retail price to cost in the prior periods. Following are the steps to calculate:

1. Computing the cost-to-retail percentage.

2. Then, calculate the cost of goods that are available for sale.

3. Calculate the cost of sales that occurred during the period

4. In order to calculate the ending inventory, use the formula as:

5. Ending Inventory = Cost of goods available for sale – Cost of sales during the period.

 

Methods for Valuing Stocks at the End of the Day

Any of the valuation methods can be used to determine the closing stock value, depending on the company’s needs and the nature of the stock. Inventory valuation methods are what they are called.

• Method of calculating the average cost

• Costing technique based on the Weighted Average

• Costing technique based on the Moving Average

• The first-in, first-out (FIFO) technique of costing

• The LIFO (last-in, first-out) technique of costing is

• The price of the most recent purchase

• Methodology for calculating costs

• At zero cost

The methodologies and processes used to determine closing stock differ, and this has a direct impact on the business’s profitability. As a result, firms must select a strategy that is better appropriate for the products they deal with.

The Effect of the Pricing Method on the Closing Stock

The approach used by a corporation to price inflation has an impact on its financial situation and profitability. If the corporation chooses LIFO, the cost of products sold will be greater (assuming inflation continues to rise), lowering gross profit and lowering taxes. It is one of the main reasons why businesses choose LIFO accounting over FIFO accounting. Another good explanation is that utilizing FIFO will result in a bigger amount of closing stock in the balance sheet than using FIFO.

The manner of inventory management has an impact on ratios. When FIFO is employed, the current ratio (current assets / current liabilities) will be higher. The number of Current Assets will rise due to ending stock. If FIFO is used, however, the inventory turnover ratio (Sales / Average inventory) will be lower.