Key Financial Metrics and Cost Accounting Methods for Business
Payback Period (PP)
The time it takes for an initial investment to be repaid from the net cash inflows of a project.
Characteristics
- Does not consider the time value of money.
- Ignores cash flows that occur after the investment has been repaid.
Formula: Year Before Full Repayment + (Unpaid Amount / Net Cash Flow in Repayment Year)
Interpretation: “I will have to wait X years to recuperate the initial investment.”
Accounting Rate of Return (ARR)
Expresses the average accounting operating profit an investment
Read MoreUnderstanding Inflation and Central Bank Monetary Policy
Concepts and Causes of Inflation
Concept: Inflation is the widespread and sustained increase in the prices of goods and services in an economy. When inflation or deflation appears, stable prices are lost, generating uncertainty.
Causes: Inflation is typically caused by the behavior of aggregate demand, changes in costs, and defective economic structures.
Types of Inflation
Demand-Pull Inflation
This occurs due to excess aggregate demand over aggregate supply.
- Monetarist School: Excess demand is produced
Essential Concepts in Cost Management and Classification
Cost Management: Key Decision Costs
Costs Important for Decisions
- Explicit Costs: Actual expenditures incurred by the firm to hire, rent, or purchase the inputs required for production.
- Implicit Costs: The value of inputs owned and used by the firm in its own production activity.
Cost Classification
- Historical (Accounting) Costs: Explicit costs representing what has actually been spent or paid for inputs.
- Replacement Costs: Costs associated with duplicating the productive capability of an item using current
Financial Ethics Failures and the Crisis of Accountability
Financial Ethics and Accountability Failures
The Roots of the Financial Crisis
Over the last decade, numerous examples have shown how values and ethics have been ignored in the financial world.
The risky decisions and lack of values are cited as principal causes of the crisis, according to the Laroisière Report. The lack of values, often driven by wrong incentives for executives, led to the mispricing of risk and an increase in leverage. There was also a complete lack of transparency.
The increase
Read MoreUnderstanding Global Trade: Benefits, Barriers, and Institutions
The Fundamentals and Benefits of International Trade
Comparative Advantage and Specialization
- Countries benefit by specializing in goods they produce at the lowest opportunity cost.
- All countries can be better off than operating in isolation.
- World output is maximized (combined GDP of all nations increases).
- Promotes necessary trade (e.g., oil for soybeans).
Role of Natural Resources in Trade
- Some countries possess superior land and seasons for agriculture.
- Seasonal differences create significant trade
Public Finance Essentials: Taxation, Budgets, and Market Failure
Public Finance Principles: Social Advantage and Market Failure
The Principle of Maximum Social Advantage (MSA)
The Principle of Maximum Social Advantage is one of the fundamental principles of public finance, introduced by Professor Hugh Dalton. It provides guidance to governments on how to use taxation and public expenditure in such a way that social welfare is maximized.
Concept of MSA
Public finance involves two main activities:
- Taxation: which imposes a burden (sacrifice) on the people.
- Public Expenditure: