ENGINEERING ECONOMICS & FINANCIAL ACCOUNTING - FIRMS

7/28/2019 ENGINEERING ECONOMICS & FINANCIAL ACCOUNTING - FIRMS

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Dr.K.Baranidharan

Present by…



Engineering Economics &

FinancialAccounting ment

Ee&fa213 July 2013



FIRMSPrepared by :

Dr. K. BARANIDHARAN



FIRM

• Definition of firm

• “A firm is the small business unit involved in

producing the profit”…………..

•

Business (company, enterprise or firm) is alegally recognized organization designed to

provide goods or services, or both, to

consumers, businesses and governmentalentities.

• Businesses are predominant in capitalist

economies.



• Most businesses are privately owned.

• A business is typically formed to earn profit that

will increase the wealth of its owners and growthe business itself.

• The owners and operators of a business have asone of their main objectives the receipt orgeneration of a financial return in exchange forwork and acceptance of risk.

• Notable exceptions include cooperative

enterprises and state-owned enterprises.Businesses can also be formed not-for-profit orbe state-owned.



• “the Firm is a unit that produces

a good or service forsale”

-

Edwin Mansfield

• “ a firm is on organisation that

combines and organise resources

for the purpose of producing

goods and services for sale atprofit”- Salvatore



TYPES OF FIRMS



• Firms or business may be organised in various

types, depending on the size, nature, legal

framework of the economy and need forresources.

• Based on the concept, firms may be divided

into three broad categories:• A) Private sector (Proprietorship, Partnership,

Company and Cooperative)

•B) Public sector (Company, Corporation anddepartment)

• C) Joint sector



SOLE PROPRIEORSHIP

• A sole proprietorship is a business

owned by one person.

• The owner may operate on his orher own or may employ others.

•

The owner of the business haspersonal liability of the debts

incurred by the business.



• Advantages

• Simple and easy

to start or exit

• Undivided profit

•

Secrets of trade• Prompt decision

making

• Personal touch to

business

• Limitations

• No separate

entity of firm

• Unlimited liability

•

Limitedavailability of

funds

• Uncertain life of business



PARTNERSHIP

• A partnership is a form of business in which

two or more people operate for the

common goal which is often making profit.

• In most forms of partnerships, each partner

has personal liability of the debts incurred

by the business.

• There are three typical classifications of

partnerships: general partnerships, limited

partnerships, and limited liability

partnerships



Characteristics

• Association of 2 or more persons

• Agreement to voluntarily form

partnership

• Business carried out by all or any

one acting for all

• Partnership deed



• Advantage

•

Easy formation• Strong credit

position

• Shared risk

• Shared

resources

• Limitations

•

Uncertain lifeof firm

• Unlimited

liability

• Insufficient

funds



Corporate or Company•

Just like private sector when governmentinvests in production activities and enter the

market, such firm are called as Public sector

Units (PSUS

) or Public sector Enterprise (PSES

).

• These PSUS or PSES have to operate on the same

ground as any other joint stock company, with

the single exception that there are no

shareholders, as the government own of the

entire controlling amount of invested capital.



• This unit play very significant role

in many respect like: employement

generation, development of product

where private sector does not want

to enter, balanced economicdevelopment and equitable

distribution of National wealth.• In India : ONGC,NTPC,BSNL



• Advantages

• Balanced

economic growth• Employment

generation

• Profit for public

welfare

• Limitations

• Evils of

bureauracy

• Absence of

profitincentive



CORPORATION• A corporation is either a limited or unlimited

liability entity that has a separate legalpersonality from its members.

• A corporation can be organized for-profit or not-

for-profit.• A corporation is owned by multiple shareholders

and is overseen by a board of directors, which

hires the business's managerial staff .

• In addition to privately owned corporate models,

there are state-owned corporate models.



• Another structure of organisation is in

the form of a CORPPORATION OR A

board.• The corporation or board normally

controlls some of the economic

activities, especially where thegovernment feels that government

intervention is necessary for equal

distribution of economic resources.

• Example: KVIC, COIR board, FCI, railway



Department

• A department is run for a specific

purpose related to social utility, such as

education, health, civil administration,

et.,• This department normally functions

under the directives od relevant

ministries, at the appropriate level.• Example; state (education)and central

govt (customs, telephone).



Joint stock company

•The most important type of businessorganisation today is the joint stock company,commonly called “COMPANY”

• Registered companies act 1956 (certificate of

incorporation)

• Prepare Memorandum and Articles of association

•

Capital: shares and depentures• Owner ; share holders

• Management ; board of Director



• A company has 2 basic forms,

namely

•Private Limited and

•Public Limited Company



Private Limited Company

• The maximum number of shareholders in

such a company is LIMITED TO FIFTY.• The SHARE transferable among

members only.

• Certain return submitting to Registrar

• PLC operate certain restriction; it can

neither issue of PROSPECTUS, nor can itraise CAPITAL by SELLING to OUTSIDE

PUBLIC other than the members.



Public Limited Company• The Joint stock company may take the form

of a public limited company, in which thereis no LIMIT on the MAXIMUM MEMBERS

through minmum number of member

SEVEN

• Submit certain statement and the balance

sheet to the Registrar of joint stock

companies on an annual basis.

• It can invite the PUBLIC to buy shares by

issuing prospectus



• Advantages

•

Limited Liability• Perpetual

existance

• Separate entity

• Large funds

•

Economic largescale

• Limitations

• Indifference of share holders

•

Complex information



CO-OPERATIVES• Often referred to as a "co-op", a cooperative is

a limited liability entity that can organize for-profit or not-for-profit.

• A cooperative differs from a corporation inthat it has members, as opposed toshareholders, who share decision-makingauthority.

• Cooperatives are typically classified as either

consumer cooperatives or workercooperatives. Cooperatives are fundamentalto the ideology of economic democracy



OBJECTIVES

• (a) Maximization of the sales revenue

• (b) Minimization of overall costs

•

(c) Maximization of firm‘s growth rate• (d) Maximization of Managers utility function

• (e) Making satisfactory rate of Profit

•(f) Long run Survival of the firm

• (g) Entry-prevention and risk-avoidance



Objectives of firm

Profit maximisation

Sales maximisation

Revenue maximisation

Satisficing profit

Limit pricingObjectives

of firm



PROFIT BUSINESS OBJECTIVES• Profit means different things to different people.

• To an accountant ―Profit means the excess of revenue over all paid out costs including bothmanufacturing and overhead expenses.

• For all practical purpose, profit or business income

means profit in accounting sense plus non-allowable expenses.

• Economist‘s concept of profit is of ―Pure Profitǁ

called ‗economic profit‘ or ―Just profitǁ.• Pure profit is a return over and above opportunity

cost, i. e. the income that a businessman mightexpect from the second best alternatives use of his

resources



SALES REVENUE MAXIMISATION

• The reason behind sales revenue maximisation

objectives is the ownership & management inlarge business corporations.

• Managers an opportunity to set their goal other

than profits maximisation goal, which most-owner businessman pursue.

• Given the opportunity, managers choose to

maximize their own utility function.• The most plausible factor in manager‘s utility

functions is maximisation of the sales revenue.



• The factors, which explain the pursuance of

this goal by the managers are following:.

• First: Salary and others earnings of managersare more closely related to sales revenue

than to profits

• Second: Banks and financial corporationslook at sales revenue while financing the

corporation.

• Third: Trend in sales revenue is a readily

available indicator of the performance of the

firm

MAXIMISATION OF FIRMS GROWTH



MAXIMISATION OF FIRMS GROWTH

RATE• Managers maximize firm‘s balance growth rate

subject to managerial & financial constrainsbalance growth rate defined as:

• G = GD – GC

• Where GD = Growth rate of demand of firm‘s

product & GC= growth rate of capital supply of

capital to the firm.

• In simple words, A firm growth rate is balancedwhen demand for its product & supply of capital

to the firm increase at the same time.



MAXIMISATION OF MANAGERIAL

UTILITY FUNCTION• The manager seek to maximize their own utility

function subject to the minimum level of profit.Managers utility function is express as:

• U= f(S, M, ID)

•

Where S = additional expenditure of the staff • M= Managerial emoluments

• ID = Discretionary Investments

• The utility functions which manager seek to

maximize include both quantifiable variables likesalary and slack earnings; non- quantifiablevariables such as prestige, power, status, Jobsecurity professional excellence etc.

LONG RUN SURVIVAL & MARKET



LONG RUN SURVIVAL & MARKETSHARE

• According to some economist, the primary goal of the

firm is long run survival.• Some other economists have suggested that attainment &

retention of constant market share is an additionalobjective of the firm‘s.

• the firm may seek to maximize their profit in the long runthrough it is not certain.

• Entry-prevention and risk-avoidance, yet anotheralternative objectives of the firms suggested by some

• economists is to prevent entry-prevention can be:

• 1. Profit maximisation in the long run• 2. Securing a constant market share

• 3. Avoidance of risk caused by the unpredictable behaviorof the new firms



• Micro economist has a vital role to play in running of any

business. Some basic internal issues with which micro-

economist are concerns:

• i. Choice of business and nature of product i.e. what toproduce

• ii. Choice of size of the firm i. e how much to produce

• iii. Choice of technology i.e. choosing the factor-

combination

• iv. Choose of price i.e. how to price the commodity

• v. How to promote sales

• vi. How to face price competition• vii. How to decide on new investments

• viii. How to manage profit and capital

• ix. How to manage inventory i.e. stock to both finished &

raw material



Economic Goal of the Firm

•Short-run vs. Long-run –Nothing to do directly with calendar time

–Short-run: firm can vary amount of

some resources but not others –Long-run: firm can vary amount of all

resources

–At times short-run profitability will besacrificed for long-run purposes



Goals Other Than Profit

•

Economic Goals –Market share, Growth rate

–Profit margin

–Return on investment, Return on assets –Technological advancement

–Customer satisfaction

–Shareholder value



Goals Other Than Profit

•Non-economic Objectives –Good work environment

–Quality products andservices

–

Corporate citizenship, socialresponsibility



Dr.K.Baranidharan

THANK YOU

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ENGINEERING ECONOMICS & FINANCIAL ACCOUNTING - FIRMS