FNS60215 Advanced Diploma of Accounting: Apply Economic Principles to work in the Financial Industry
1-Research and explain how you would develop and apply your knowledge of economic principles to improve business performance. Your answers should include how microeconomics influences financial products and services we buy.
Economic principles play a very important role in improving the performance of the business because the decision-making processes of businesses are directly affected by the economic principles, specifically the microeconomic principles. It is very important to understand how these microeconomic principles impact pricing, economic utility, supply and demand, the types of goods and services offered, productivity, and labor. Microeconomic principles improve the performance of the business because it is a way for businesses with the help of which the theories of human behavior are used for predicting the best decision for the business. At the microeconomic level, the most critical concepts are the demands and supply of the financial products and services we buy. It is considered as a comparison between the level of demand for certain financial products or services by customers to the availability of the supply of that financial product or service in the marketplace. Some businesses fail when supply exceeds demand. Another important aspect is the pricing because microeconomic factors are strongly correlated with the pricing strategies of businesses. Microeconomic affects the business because when prices of financial products are higher, then it will impact the buying decision of customer, which eventually can reduce the size of the customers (Thangavelu, 2019).
2-What does the term capital adequacy mean? Describe the role of the Australian Prudential Regulation Authority in Australia. How does this organization affect the regulations that apply to capital Adequacy? Include in your explanation how changes to the Basel accord in 2013 affected the Prudential Standard APS 222.
The term capital adequacy is defined as an estimate of capital made by the management with respect to observing the maximum possible losses intrinsic in the business, especially in the case of an insurance firm or bank. In other words, it is the measurement of the ability of financial institutions such as banks to pay its debts in the case when customers are not able to pay back the money (LeRoy & Werner, 2014).
The role of the Australian Prudential Regulation Authority in Australia is to enforce and develop prudential guidance, prudential standards and robust prudential legislation framework with the help of which the prudent behavior could be promoted by financial institutions, superannuation funds, and insurance companies and authorized deposit-taking institutions. Protection of the interests of superannuation fund members, policyholders and depositors is the key aim of the Australian Prudential Regulation Authority. The single licensing regime is used by APRA for regulating deposit-taking institutions. For this power is given to APRA according to the Banking Act 1959 and based on this authority and power APRA affects the regulations that apply to capital adequacy in the best interest of the depositors (APRA, 2019).
3-Whilst working in accounting explain how you will:
A-Evaluate your own work in the context of relevant economic principle
In the context of evaluating and understanding relevant economic principles, I learned that if I want anything I like, then I would have to give up or leave another thing that I like too. This means that the basic theme of making decisions is to trade one goal for another. I worked on the evaluation of ways of gaining success by entrepreneurs, by understanding economic principles (Skousen, 2015). For this, I considered a comparative approach under which I took some information of those companies using economic principles successfully and those which do not apply economic principles effectively. I realized that it is very important to apply key economic principles to market strategy if a business wants to get long term growth and success (Dincer et al., 2018).
B-Identify ways to improve your performance through the development of your understanding of how the economics will apply to own decisions making processes.
Understanding of the microeconomic factors in business is very important for own decision-making processes. Understanding economics helps in understanding the effective way of identifying the key goal before making any decision. Economic theories revealed that the next step is to collect the relevant information and data. The next step is identifying the consequences and alternatives, and the decision is made after reviewing the evidence. Reviewing decisions is very important for increasing the effectiveness of the decision making process. In this way, the economic decision-making process will improve my performance (Dincer et al., 2018).
4-What are financial modelling techniques, and how are those applied to economic data? When required to undertake research to create a financial model, how would you evaluate your research data? Explain the techniques and tools you would use to ensure your financial model is correct?
Financial modeling techniques are instrumental ways and methods used for collecting risk management and cost-effective business ideas. These techniques are mostly used by the companies for making acquisitions, raising capital, and budgeting strategy. Some of the important examples of financial modeling techniques include color-coding or linkages, assumptions, and historical data. Financial modeling techniques could be applied to economic data for making good decisions regarding the creation of equilibrium between the demand and supply of the goods and services (LeRoy & Werner, 2014).
When an individual or investors of an organization make the decision for new investment or any other financial activity then it is very important to research creating sound and quality financial model. The financial model plays a very important role in enhancing the effectiveness of the decision-making process. Some of the important techniques are given below that could be used for ensuring the financial model is correct:
- The first technique is the use of discounted cash flow analysis to evaluate the business
- Capital raising is the second technique with the help of which impact of raising equity or debt can be identified
- The third technique is the M&A analysis in which attractiveness of acquisition or merger can be evaluated (Wall Street Mojo, 2019).
5-Describe how you would determine and apply the organizational value in relation to capital structure.
The capital structure is the amount of equity and debt employed by the management of an organization for funding its operating activities and financing its assets. The capital structure is considered as one of the most important managerial decisions because it has a direct influence on the risk and return of the shareholders. The capital structure decisions affect the market value of the assets. The valuation is based on the determination of the existing and future value or worth of business. The creation of the right financial plan is very important because it helps in avoiding the negative impact that could be created with the value creation capability of an organization. If the capital financing of the organization is inadequate, then it results in the decline in sales of the organization and loss of goodwill. The most important aspect needs to be considered is that to reduce the inherent risks associated with the financing of capital projects of the organization and focus on consideration of at least the cost of borrowing because it is a good way of enhancing the value of the organization (Goedhart, 2006).
6-Choose 2 economic theories from the list below and explain the impact these have on the industry, the government, and the individual. If appropriate, include in your explanation how you will integrate contemporary economic principle into your everyday work practices.
Keynesian economics:
It is based on total spending in the country’s economy, which is known as aggregate demand and its impact on inflation and output. According to this theory, the host of economic decisions influenced the aggregate demand. Another important aspect of this theory is that there is a slow response of prices, especially the wages, to changes occurring in supply and demand, and it could result in surpluses and a shortage of labor. Third important aspects are that when changes occur in aggregate demand, whether unanticipated or anticipated, they have a certain level of impact on employment and real output but not on the prices. According to this theory, changes in output occur because of the fluctuations in any spending component such as government expenditures, investment, or consumptions (Skousen, 2015).
Monetarism
It is one of the important macroeconomic theories, and it was developed based on criticism of Keynesian economics. Because of its monetary role in the economy, it is named Monetarism (Skousen, 2015). This theory could affect the government and industry because it follows the concept of the money supply by recognizing that money supply is the key factor regarding the economy, and it works on letting the market take care of itself. It could affect the individual because it works and emphasis the government must have a right to control of controlling the amount of money in the country (Amadeo, 2019).
References
Amadeo, K., 2019. Milton Friedman’s Economic Theory of Monetarism Explained. [Online] Available at: https://www.thebalance.com/monetarism-and-how-it-works-3305866 [Accessed 20 August 2019].
APRA, 2019. The Australian Prudential Regulation Authority (APRA) is an independent statutory authority that supervises institutions across banking, insurance and superannuation and promotes financial system stability in Australia. [Online] Available at: https://www.apra.gov.au/ [Accessed 20 August 2019].
Dincer, H., Hacioglu, Ü. & Yüksel, S., 2018. Global Approaches in Financial Economics, Banking, and Finance. 1st ed. Springer.
Goedhart, M., 2006. Making capital structure support strategy. [Online] Available at: https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/making-capital-structure-support-strategy [Accessed 20 August 2019].
LeRoy, S.F. & Werner, J., 2014. Principles of Financial Economics. 2nd ed. Cambridge University Press.
Skousen, M., 2015. The Making of Modern Economics: The Lives and Ideas of Great Thinkers. 2nd ed. Routledge.
Thangavelu, P., 2019. How Microeconomics Affects Everyday Life. [Online] Available at: https://www.investopedia.com/articles/personal-finance/032615/how-microeconomics-affects-everyday-life.asp [Accessed 20 August 2019].
Wall Street Mojo, 2019. Financial Modeling. [Online] Available at: https://www.wallstreetmojo.com/financial-modeling/ [Accessed 20 August 2019].
