- Laissez-faire economics refers to a theory that says the economy should not be intervened by the government except for protecting the inalienable rights of individuals. Laissez-faire policies must require three components to work that is capitalism, the free market economy, and rational market theory these are the key premises of laissez-faire economics (The Balance, 2022). Assumptions are made as per the rational market theory that investors often base their actions on facts and logic considering emotion out of the equation (Gocardless.com, 2022).
- According to Keynesians prices are somewhat rigid, hence any fluctuations in spending or consumption, government expenditures or investment, will cause changes in output. This is considered the key premise of Keynesian economics.
- As per the fundamental principle of economics every choice has an opportunity cost involved. Opportunity cost is generally a cost that is foregone to consume or to do something else, it is the value of the next best alternative. This cost is not only in financial nature but also includes time, effort, and utility (Boycewire.com, 2022). This can be explained with an example of a farmer choosing to plant wheat, here planting a different crop or making alternative use of resources can be considered as the opportunity cost of the farmer (www.stlouisfed.org, 2022).
- Capital adequacy requirement in Australia is governed by The Australian Prudential Regulation Authority (APRA) they make and enforce rules to govern adequacy requirement of Australian Banks. Currently, in Australia, a set of rules is applied based on the latest set of international capital standards that is issued by the Basel Committee on Banking Supervision (BCBS), also known as ‘Basel II’. One such capital adequacy requirements of locally established banks involve holding total capital of 8%of their risk-weighted assets and at least half of the total capital must belong to TIER 1 better quality, implying a minimum 4% Tier 1 ratio (Gorajek and Turner, 2022).
- The two key determinants of demand include
- Price- This is considered as a key determinant of demand which follows the law of demand, and has an inverse relationship with demand. when the prices become higher demand falls and vice versa.
- Income- This factor affects the quantity demanded by the consumer. when the income increases consumers spend more money and vice versa.
A price change will cause movement along the demand curve, whereas the change in any other factors will cause the demand curve to shift right or left. For example, if a person's income falls, they may find themselves unable to afford any goods or services. As a result, the demand curve for that person shifts to the left.
- The capital assets pricing model explains the link between systematic risk and asset expected return. It is widely used to value risky assets to determine expected returns given the risks.
- Another sort of asset pricing model is the arbitrage pricing model. It uses a linear combination of numerous independent macroeconomic variables to anticipate a link between the returns of a portfolio and the returns of a particular asset. The theory allows investors and analysts to tailor their studies to their specific needs (Corporate Finance Institute, 2022).
- Investment theory is significant because it allows us to investigate investment behavior, which is a key predictor of long-term growth and business cycle dynamics in an economy.
The key premise of this theory is that when Tobin's Q ratio falls between 0 and 1, then the cost involved in replacing assets will be more than the firm’s worth. However, when it is above 1 the entity has more worth than the cost of its assets, thus indicating that the firm is overvalued.
- The difference between the current value of cash inflows and outflows is known as net present value (NPV). NPV is a financial modeling method that can be used to assess capital budgeting requirements by analyzing the profitability of a proposed investment or project.
- Following are the 4 types of institutions that operate in the Australian financial services industry, as well as the government entity in charge of monitoring and/or regulating each type, which is listed below.
- Banks:They typically offer a diverse variety of financial services to various sectors of the economy, including fund management and insurance services (through subsidiaries). In Australia, the Australian Prudential Regulatory Authority (APRA) do supervision all banks.
- Building societies: These are the societies that Accept deposits from households to raise capital, as well as provide loans (mostly mortgage finance for owner-occupied dwellings) and payment services. APRA is in charge of overseeing building societies.
- Credit unions:They provide their members access to deposits, personal/housing loans, and payment services through mutually owned banks. The Australian Prudential Regulation Authority (APRA) oversees credit unions.
- Finance companies:They offer loans to individuals as well as small and medium-sized businesses. ASIC regulates and supervises finance companies.
- As per Section 766A of the Corporations Act 2001 financial services can be identified as follows:
- an individual provides a financial service if they:
- provide financial product advice or
- deal in a financial product or
- make a market for a financial product or
- operate a registered scheme or
- provide a custodial or depository service or
- engage in conduct of a kind prescribed by regulations made for this paragraph.
- As per Section 763A of the Corporations Act 2001 financial product is defined as follows:
- A facility that allows a person to do one or more of the following through its use or acquisition:
- makes a financial investment
- manages financial risk
- makes non-cash payments
- A financial product is a facility of the type through which people routinely make financial investments, manage financial risks, or make non-cash payments, even if the facility is obtained by a specific person for a different reason.
- A facility does not cease to be a financial product simply because:
- it has been acquired by someone other than the person to whom it was initially provided; and
- that person was not making a financial investment or managing financial risk in acquiring the product.
- The Australian Competition and Consumer Commission's principal purpose is to guarantee that individuals and corporations follow Australian competition, fair trading, and consumer protection laws.
- The five key areas in which the Australian Consumer Law offers protection to consumers include:
- unfair contract terms, covering standard form consumer contracts;
- providing consumer rights when goods and services are bought;
- safety of the product
- unsolicited consumer contracts for door-to-door and telephone sales; and
- lay-by agreements.
- The general intent of the Privacy Act 1988 is to safeguard an individual's personal information.
- The Australian Privacy Principles are a set of privacy standards set out in the Privacy Act that some private sector companies and Australian government organizations must follow when collecting, holding, using, or disclosing personal information.
- The key obligations of a credit provider under the National Credit Act includes the following:
- You must be an ASIC-licensed person or a representative of someone who is licensed
- You must not enter into an improper contract with a customer, such as a loan you cannot repay without suffering difficulty or a contract that does not fulfill your needs and goals.
- The creditor is required by law to:
- Inquire about your financial condition, requirements, and goals in a sensible manner.
- Verify financial condition by taking reasonable procedures.
- Determine whether the credit agreement you are requesting is 'not unsuitable for you.
- Before they may provide you credit, credit aid providers and credit providers must make a preliminary and final assessment that the credit contract you are applying for is 'not unsuitable for you.
- This Act mandates the reporting of certain transactions and transfers to the Australian Transaction Reports and Analysis Centre (AUSTRAC), as well as the imposition of certain accounting obligations over the accountant who meets the definition of a cash dealer.
- Valid and reliable research data are required to ensure that the study measures what it was designed to measure, and reliability is required to ensure that the research measurement procedure is error-free and thus produces reliable outcomes.
- The term "standard deviation" refers to the amount of variability or dispersion around an average in statistics. It is a technical term for a measure of volatility.
- A correlation analysis is a statistical measure that ranges from +1.0 to -1.0 and represents the degree to which two or more variables are connected. A positive correlation (+1.0 to 0) means that two variables will rise or fall together, whereas a negative correlation (0 to -1.0) indicates that as one variable rise, the other falls.
- The term "economic climate" refers to the state of the regional, national, or global economy as a whole. Demand for financial services rises with economic growth and lowers with economic contraction in the financial services business. Recessions can have a major detrimental influence on the financial services sector.
- The financial services business may be impacted by the government's political inclination. Deregulation of some parts of the financial services industry, for example, can make it easier for businesses to operate.
The main objective of this report is to provide a brief understanding of how the knowledge of economic theories and principles has helped accountants in doing their work. This paper also addresses the impact of economic trend relevant to the work of an accountant as well as provide a detailed discussion about how the entity’s performance can get improved by understanding how economies can be used for own decision making.
Accountants are expected to provide insights into the company's financial health, hence the education and understanding of economics enable us to provide a more detailed explanation of how and why an account moves. Auditors who are also accountants use their economics knowledge to provide analysis as part of their audit. Understanding interest rate patterns and market conditions, for example, may provide the auditor with confirming evidence as to the reasonableness of the client's investment valuation.
During the current era, various economic trends are affecting the work of the accountant this includes the rise of Cloud Accounting, emailing spreadsheets back and forth no longer exist, finding of errors and inconsistencies as well as being reliant on the desktop accounting is now replaced with cloud computing. Through the cloud, computing accountant can do their work more easily within a short time. Another economic trend includes the focus towards helping the small and mid-sized businesses as a result of which accounting firms are now providing advisory services besides tax and compliance. Advancement in technology has also helped in increasing the efficiency of the entity, there is a wide variety of solutions are now available that simplify and expedite so many processes in an accounting entity (Cpapracticeadvisor.com, 2022).
For conducting any business in Australia, it is essential to understand the corporate regulation and their impact on the business, thus in this paper, we have discussed two corporate regulations that an entity must understand:
- Australian Consumer Law (ACL) – this law provides regulation on product safety laws, unfair contract terms, unsolicited consumer agreements, consumer rights guarantees, lay-by agreements, and penalties, as well as covers some other areas.
- Competition law- this law provides a framework to ensure that trading remains fair for all businesses and consumers (International et al., 2022),
By understanding all the economic laws accountant can easily make a business decision during a time of uncertainty. It will assist in solving the problem easily for an entity and take decisions if certain economic laws consisting of demand, competition, prices, profits, national income, etc. are known. Application of economic theory such as income elasticity, price elasticity, supply elasticity, etc. can enable the accountant to estimate the volume of business in the future thus increasing the performance of the organization. Besides this, it will also help us in forecasting future profit, output, demand, etc., and assist in taking economic decisions and plans (knowledgiate.com, 2022).
Subject: (attachment of economic report and reflection report)
I am glad to inform you that I have completed the preparation of the economic report and reflection report for the organization. I am writing this letter to inform you why I have prepared an economic report and a reflection report for the entity and how it is useful for making decisions.
The main purpose of attaching the given report is that it will help the management to understand the factor affecting the demand and supply of the entity as well as help them to determine the impact the movement in price will have on their services. The economic report will provide them with a detailed understanding of the economic impact that may affect the business. In addition to this, I have also attached a reflection report that discusses how understanding the economic theories will help an accountant and management in improving the performance of the entity.
Please check the attached file in the email. I hope these two attachments will assist you in making the appropriate decisions.
We look forward to hearing from you!
Subject: (attachment of capital investment report and debt financing report)
This is to inform you that as per your instruction given, I have completed the preparation of the capital investment report and debt financing report of the organization. I am writing this letter to provide you with a summary of both these reports
A capital investment report is prepared with an objective to provide a brief understanding of different capital budgeting techniques used for evaluating the investment project of the organization. In this report, we have discussed different capital budgeting methods and their interpretation as well as a recommendation is given on whether to accept the project or not. Besides this, our debt financing report will provide you with a suitable recommendation for choosing the right solution for financing the new investment and also discusses various types of financing options.
Thus, I hope both this report will provide you with a detailed analysis of the organization’s capital budgeting decision as well as help you in understanding the financial option as well as a suitable financing solution for the entity.
Boycewire.com, 2022. Opportunity Cost Definition | 4 Examples | Economics | BoyceWire. [online] Boycewire.com. Available at: <https://boycewire.com/opportunity-cost-definition/> [Accessed 12 March 2022].
Corporate Finance Institute, 2022. Arbitrage Pricing Theory. [online] Corporate Finance Institute. Available at: <https://corporatefinanceinstitute.com/resources/knowledge/finance/arbitrage-pricing-theory-apt/> [Accessed 12 March 2022].
Cpapracticeadvisor.com, 2022. 3 Trends That Are Affecting The Accounting Profession. [online] Cpapracticeadvisor.com. Available at: <https://www.cpapracticeadvisor.com/accounting-audit/news/12198703/3-trends-that-are-affecting-the-accounting-profession> [Accessed 12 March 2022].
Gocardless.com, 2022. Laissez-Faire Definition and Examples. [online] Gocardless.com. Available at: <https://gocardless.com/guides/posts/laissez-faire-definition-principles-and-examples/> [Accessed 12 March 2022].
Gorajek, A. and Turner, G., 2022. Australian Bank Capital and the Regulatory Framework | Bulletin – September Quarter 2010. [online] Reserve Bank of Australia. Available at: <https://www.rba.gov.au/publications/bulletin/2010/sep/6.html> [Accessed 12 March 2022].
International, F., Australia, I., investing, G., business, R., regulation, U. and laws, A., 2022. Australian business and environment laws. [online] Austrade.gov.au. Available at: <https://www.austrade.gov.au/international/invest/guide-to-investing/running-a-business/understanding-australian-business-regulation/australian-business-and-environment-laws> [Accessed 12 March 2022].
knowledgiate.com, 2022. Application Of Economic Theory In Decision Making | Business Finance and Accounting Blog. [online] Business Finance and Accounting Blog. Available at: <https://www.knowledgiate.com/economic-theory-in-decision-making> [Accessed 12 March 2022].
The Balance, 2022. What's Wrong With Laissez-Faire Economics?. [online] The Balance. Available at: <https://www.thebalance.com/laissez-faire-definition-4159781> [Accessed 12 March 2022].
www.stlouisfed.org, 2022. opportunity-cost. [online] www.stlouisfed.org. Available at: <https://www.stlouisfed.org/open-vault/2020/january/real-life-examples-opportunity-cost> [Accessed 12 March 2022].
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