Financial Literacy for Managers: Economic and Accounting Report

This report provides a comprehensive overview of financial literacy, focusing on business economic concepts and accounting principles relevant to managerial decision-making. It examines globalization, labor markets, and the impact of interest rates and government policies on financial decisions. The report delves into accounting and finance concepts, including financial statements, decision-making tools, and investment appraisal techniques such as Net Present Value (NPV) and Internal Rate of Return (IRR). It includes practical calculations like loan amortization schedules and future value analysis, illustrating how these tools can be applied to real-world financial scenarios. The report emphasizes the importance of understanding financial information for effective planning and strategic decision-making within organizations. It also covers market structure, demand and supply dynamics, and the application of these concepts in the UK market, providing a well-rounded understanding of financial literacy for managers.

FINANCIAL LITERACY
FOR MANAGERS

Table of Contents
INTRODUCTION...........................................................................................................................1
1. USES OF BUSINESS ECONOMIC CONCEPT........................................................................1
a).............................................................................................................................................1
b).............................................................................................................................................2
c).............................................................................................................................................2
2. ACCOUNTING AND FINANCE CONCEPTS..........................................................................3
QUESTION 3 ..................................................................................................................................5
(a) Calculation of loan amortization schedule........................................................................5
Question 3(c) Calculation of Net Present Value (NPV).........................................................8
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11
APPENDIX....................................................................................................................................12

Illustration Index
Illustration 1: Income statement for analysing financial position of entity.....................................4
Illustration 2: IRR for decision making...........................................................................................5
Illustration 3: Principle interest ratio...............................................................................................6
Index of Tables
Table 1: Loan Amortization Schedule.............................................................................................5
Table 2: Future Value Calculation...................................................................................................7
Table 3: NPV of Project A...............................................................................................................8
Table 4: NPV of Project B...............................................................................................................8

INTRODUCTION
Financial and Economic Literacy is an ability to use the economic concept to make
effective decision related to earning, saving and spending of money. The present report
describes the principles of business and financial economics in international context. It also
explains the impact of government monetary policy while making declension related of earnings.
Furthermore, it describes the concept of micro and macro model and interpreting the financial
information which is essential for making effective decision. At last, it also examines the
relationship between theory, application which is related to the business and financial economics
are presented in the report.
1. USES OF BUSINESS ECONOMIC CONCEPT
a)
Globalisation: It includes various kind of general information such as cutting the
national boundaries, higher integration or independence of human societies etc. Globalisation
plays an important role in creation of employment in UK. If one company make a business
approach outside than it will make both positive and negative impact in process of employment.
Many companies hire temporary workers because market liberalization policies are changing
frequently. Firm also want growth by segmenting them into new market. Globalization is
important for improving the standard level of bhusiness (Borio, 2014). In respect to this,
organisation need to hire those workers who frequently adopt the new changes in their working
place. Hence, company hire temporary workers who can work easily and switch into new field.
As per the research, there are many companies in UK which hire temporary workers. As a result,
the rate of hiring temporary workers will be increases with 17% in 2016.
Labour markets: Temporary employment include those people whose termination date
is already determined and they will perform as per the wage and salary. Due to changes in labour
market, there will be changes in the number of temporary workers in UK. As per the research, it
has been found that in UK, if rate of labour market is increases with 15% than it will directly
impact on the rate of temporary workers which also be increase with 13% in 2016.
Demand and supply: Law of demand and supply shows the inverse relation with each
other. According to law of demand, if the price of goods is increases than quantity of related
good will decreases. In the case of temporary workers, if the number of workers rate is increases
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with 5% than the rate of wages will also decreases with 5%. On the other hand, law of demand
state that if price increases than the number of person will also increases. As a research, it was
analyses that in 2016, wage rate in UK increase with 3.4%, which shows the postpositive impact
in the temporary worker rate will also increases with 3.2%.
b)
There is a greater impact of fluctuations in the interest rates. It shows that lenders will
lend money on cheaper rates. It shows that the entity will be able to borrow funds at low interest
rates and it will be easy for them to make payments and it can expand in the market. However, it
also indicated that there is enough money available with the banks. It is situation of relief for the
borrowers but savers will also get lower return for the specific period (Borio, 2014).
Decrease in tax rates encourages the long-term growth of the economy. It suggests
individuals to save more. It also induces reduction in interest rates as well. Organisations tend to
invest in their entity more which further encourages their profitability. It has a direct impact on
economic growth as well (Brunnermeier, Eisenbach and Sannikov, 2012).
Increase in government expenditure lead to increase in GDP. It can be result of high tax
rates and high interest rates both.
According to the given statement interest rate have reduced to 0.25%. Taxes have also
reduced to 5%. However, there is an increase government expenditure by 10%. For instance, tax
rates have reduced from 10% to 8%. Interest on which bank extends loans to the entity have
reduced from 15% to 12%. It will increase the buying power of the entity and the consumer both.
c)
Market Structure: In UK, there are large number of people purchase the different types
og good from various kinds of countries. As making comparison between Sainsburry, London
Under Ground, McDonald etc. there are many fractions. UK market in rapidly dominated by the
few firms. As per the game theory approach, this theory is beneficial for analysing the
oligopolistic situation in market. As per the research, until 2012 these 3-firm concentration ratio
is 72.3% which is down as compare to year 2011 which is 75%. Sainsburry is the highest
dominated company which acquire 1200 stores in UK market.
Demand and Supply: Products demand and supply highly affected by the buying
behaviour of the customers. As per the research, it has been analysed that if the price of
Sainsburry is increased than customer shift to the substitute company. In case of McDonald, if
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the demand of burgers is increased than company provide wide ranges of food products to the
customers.
Hence, Demand & supply and market structure plays an important role of customer's
buying decision.
2. ACCOUNTING AND FINANCE CONCEPTS
Accounting and financial information of any organisation shows economic position and
its profit earning capacity which linked with further business operations. However, analysing
these tools are suitable for decision making and preparing planning regarding further business
operations. In this regard, financial manager of the company identifies financial statements of the
firm such as; profit and loss account, balance sheet etc. However, for decision making process,
they use different tools as; budgeting, investment appraisal techniques and so on. In order to this,
analysing these statements which show monetary performance of entity remains useful for
economic stability and increasing financial position of the firm at higher level. It is linked with
production and supplement of goods and services provided by entity adequately. However,
financial statements for identifying fiscal point of the company can be expressed as below:
Financial statements: There are several financial statements are prepared by accountant
of the organisation such as profit and loss account, balance sheet, income statement, cash flow,
fund flow etc. These are helpful to recognise organisation's financial position and further price
determination and decision making for effective investment on business activities. However,
income statement for the organisation is evaluated as below:
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In above mentioned income statement structure, profitability of organisation is presented.
In accordance to this, it is recognised that entity has earned revenue of 21000 on production of
6600. Therefore, gross profit of the firm is calculated as 14400 which is effective and shows
favourable profitability of entity. Further, for calculating net profit of the firm, gross profit is
deducted with expenses incurred on variable overhead. Therefore, net profit of the entity is
determined as 12600 which shows good profit earning potential of entity as well forecasts for
increasing financial performance of the organisation at higher level. Thus, on the basis of this
analysis, it can be estimated that in future, profitability of organisation can be improved which is
related with other business operations effectively.
Decision making tools: Various decision-making tools are used for proper planning and
strategies of the organisation that affects productivity and profitability of the organisation. It
involves tools like; capital budgeting, ratio analysis, variance analysis and so on. However, these
tools can be understood as:
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Illustration 1: Income statement for analysing financial position of entity

 Capital budgeting: It involves investment appraisal techniques in which different
method are used for decision making regarding investment on business operations. For
example; Net present value (NPV), Average rate of return (ARR), Return on investment
etc. Therefore, the best project and option is selected by using these tools and estimating
for further return on investments. However, for this entity, IRR can be evaluated as:
It is interpreted that organisation is planning to invest 15000 and cash inflows for further
inflows for 4 years are estimated as 8000, 10000 and 5000 for next 2 years. However, IRR for
projection is interpreted as 34.77% which remains effective and favourable for organisation's
effectiveness and its profitability. Thus, it is recognised that adequate decisions regarding
business activities can be made using investment appraisal technique.
QUESTION 3
(a) Calculation of loan amortization schedule
Principle 60000
Year 3
Interest rate 5.00%
Table 1: Loan Amortization Schedule
Yearly Amortization Schedule
Year Beginning Balance Interest Principal Ending Balance
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Illustration 2: IRR for decision making

1 60000 2568.25 19010.75 40989.22
2 40989.22 1595.63 19983.37 21005.8
3 21005.8 573.24 21005.76 0
Amortization means repayment of debt in systematic manner. The payment is made in
equal instalments. The main advantage of amortization schedule is that the payment is aware of
the amount that is to be paid every month. A certain rate of interest is paid on the principle
amount every year. Amortization table can be prepared in order to assess the amount of loan
repayment (Wray, 2015).
Monthly payment is made to the lender in case of amortization. The payment made
covers interest amount and some part of principal amount. Since the principle amount decreases,
interest also gets reduced over a period. It reaches to zero at the end of the tenure of loan
(Brunnermeier, Eisenbach and Sannikov, 2012).
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Illustration 3: Principle interest ratio

According to the scenario given in the question, one borrowed 60000 for his business
where loan has to be paid in equal instalments at the end of each of three years. The rate of
interest is 5%. It has been noticed that the interest payment has been decreasing year by year.
Interest amount was 2568.25 in the end of first year. It gets reduced to 1595.63 which further
reduced to 573.24 in the end of third year. The yearly calculation of loan has also been calculated
which displays the same interpretation (Attached in appendix).
The amount paid includes 93% of the principle and 7% of interest. A total of 4737.13 has
been paid on the principle loan of 60000 by the payer.
Interest rate 5.5
Table 2: Future Value Calculation
Year Amount Annuity factor Future value
1 400 0.50 802.92
2 300 0.49 614.55
3 250 0.42 590.91
Total 2008.38
A series of payments are made in equal intervals. It is basically made on monthly home
mortgage payments, insurance and pension payments, savings account etc. Payments can be
made weekly, monthly, quarterly, yearly or in any other regular interval.
The formula used for payment of annuity is as follows:
Annuity payment = PV / [ {1 - (1 + r) ^ - n} / r]
According to the given question, cash have been invested at the end of 3 years where, 400
was invested in the first year, 300 was invested in the second year and 250 was invested in the
third year. The rate of interest applied on it is 5.5%. By using the above-mentioned formula, the
annuity factor received for the three years are, 0.50, 0.49 and 0.42. It further helped in
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calculating the present value of the invested amount. The total present value of the invested
amount is 2008.38.
Annuity method of investment is appropriate for the individuals who are looking for
guaranteed retirement income. This type of investment is not suggested to younger individuals as
the amount cannot be withdraw as and when required. It is a less risky type and a fixed income
can be expected from it. Immediate annuities are also purchased by people who have received
large amount of money in lump sum and expect to get return in the future.
Question 3(c) Calculation of Net Present Value (NPV)
Project A:
Table 3: NPV of Project A
Cost of Capital 7.35
Net Present Value
Year Project A Discounted factor Present Value
0 -50000 1 -50000
1 15000 0.93 13972.99
2 15000 0.87 13016.29
3 15000 0.81 12125.09
4 15000 0.75 11294.92
5 15000 0.70 10521.58
Net Present Value (NPV) 10930.87
Project B:
Table 4: NPV of Project B
Cost of capital 7.35
Net Present Value
Year Project A Discount Factor Present Value
0 -50000 1 -50000
1 0 0.93 0
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2 0 0.87 0
3 0 0.81 0
4 0 0.75 0
5 99500 0.70 69793.16
Net Present Value 19793.16
Net Present Value is the difference between present cash flows and outflows. It is an
important part of capital budgeting as it assesses the profitability of the project. Further, it
measures whether the investment or project an individual is going to make will prove to be
profitability for the entity or not. The following formula is used in order to calculate Net Present
Value of any project or investment:
Net Present Value =
where,
Ct = Net cash inflow during the period 't '
Co = Total investment in the project or investment
r = Discount rate
t = Number of time period in years
A positive net present value denotes that the project will prove to be beneficial for the
entity. It will generate earnings which exceeds to the cost that have been invested in the project.
Generally, negative NPV shows that the investor will not able to get its investment back in a
significant amount of time (Mankiw, 2014). It means that the investment amount will be less
than the earning generated from the project. It also considers time value of money factor which
says that the present worth of money is more than the same amount in the future. There is a
potential of inflation in the economy.
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