Chapter 1 Elements of Financial Statements

Chapter 1 Elements of Financial Statements - Chapter One:...

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Chapter One: Elements of Financial Statements ROLE OF ACCOUNTING IN SOCIETY Market Based Allocations Market – group of people or entities organized to exchange things of valie The market for business resources involves three distinct particicipants: Consumers – resource users (Resources, however are frequently not in a form that consumers want.) Conversion Agents (Businesses) – transform resources (such as trees) into desirable products (such as furniture) Resource Owners – control the distrubution of resources to conversion agents Profit, Income, or Earnings – added value created in the transformation process Consumer demand determines the allocation of resources. Financial Resources Financial Resources (Money) – needed by conversion agents in order to establish and operate their business Investors and creditors are two primary providers of financial resources. Investors – provide resources in exchange for ownership interests in a business o Ownership interests entitle investors to share in the distribution of income. o Investors allocate resources to businesses based on their assessment of how profitable they expect a business to be. Creditors – provide financial resouces to businesses on a lending basis. Liquidation – the process of dividing remaining assets and returning them to resource providers Assets are distributed to creditors first. Any remaining assets are distributed to investors (owners). Both creditors and investors can lose resources when businesses fail. Because of their more secure position, creditors normally do not share business profits. Instead, they receive interest. Interest – a fixed fee based on the amount of resources provided. Physical Resources Physical Resources - natural resources
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The process of transforming natural resources can include several stages and numerous independent businesses. Labor Resources Labor Resources – include intellectual as well as physical labor Market Based Allocations Accounting provides information useful in evaluating a conversion agent’s profit potential and relative risk. Accounting plays a major roll in determining how resources are assigned to conversion agents. Types of Accounting Information
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Chapter 1 Elements of Financial Statements - Chapter One:...

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