ACCT1101 - Lecture 1

50 ab va lue ad d e d 300 050 34 5 explain

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Unformatted text preview: e and are prepared to pay for it. Value is added to society when an Value organisation transform resources from a less desirable form or location to a more desirable form or location. 32 Accounting measures the increase in value created by Accounting a transformation as the difference between: Total price of Total price goods and services sold Total costs of costs resources consumed in developing, producing, and selling the goods and services Profit Profit made by the seller (Value added) added) 33 Value added by transforming resources } (B) T o ta l c o s t o f re s o u rc e s c o n s um e d to p ro d uc e a nd m a ke o ne b o x o f b is c uits a va ila b le (A) S a le s p ric e o f o ne b o x o f b is c uits $3.50 (A) – (B) Va lue Ad d e d – $3.00 = $0.50 34 5. Explain how accounting helps investors and other decision makers understand businesses. businesses. Why owners invest in a business? T h e y in ve s t to re c e ive a return on their investments fro m p ro fits e a rn e d b y th a t b u s ine s s . ROI = (Return on Investment) Profit Amount invested Return of Investment is a return of a portion of the original investment What can the business do with the profit? What ­ Dis trib ute to o wne rs ­ R e inve s t in b us ine s s to g ro w a nd e a rn m o re p ro fits 35 Lets go back to our scenario: If Me g a n a n d R ya n inve s te d $ 1 0 0 0 0 to s ta rt Mum ’s Bis c uits P ty Ltd a nd e a rn e d a $ 1 7 0 0 p ro fit, wh a t wo u ld b e th e re turn o n inve s tm e nt? ROI = $1 700 $10 000 = 17% Is this good? How can we tell? What are the alternatives? Are the alternatives of the same risk? Why is risk important? Why Higher risk would require a higher return. Consider an investment in a bank….high or low risk? High or low return? low 36 Effective vs efficient? Effective An effective business is An effective one that is successful in providing goods and services demanded by customers. customers. An efficient business is An efficient one that keeps the cost of resources consumed in providing good and se...
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