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Finance and Accounting Detailed Summary 1
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Summary Finance and AccountingChapter 1: Businesses and their role in the economy
• Business = a profit-based production organisation
- Production = transformation of production resources into end products
- Organisation = collaboration of participants
- Profit = sales revenues > costs of resources
• Economics: is concerned with the consumer - manufacturer relationships
• Micro economics: seeks to analyse market forms
• Macro economics: is concerned with economic problems that affects society as a whole
(such as inflation and unemployment)
• Financial management: is concerned with economic activities within a production
organisation
• Production process:
- The supplier market delivers raw materials, fixed assets and labor —> production
process —> end products, being sold by the retail market
- The retail market sells the end products, and invests the money made back into
the supplier market.
• Stakeholders:
- Owners(s)
- Employees
- Suppliers
- Clients
- Government (tax authority!)
• The level of profit depends on:
• Efficiency: relates to the cost-effectiveness of the production process
• Effectiveness: to meeting the target objectives of the production process (end product
meets the customer requirements)
INPUT —> (transformation process) —> OUTPUT —> (target realisation)
I______________ Efficiency ______________I I_______Effectiveness____I
—> unit cost —> sales revenue
• Profit (difference between revenues and expenditures)
- A necessity
- Can lead to too much emphasis on the short term
• Continuity (ability to stay in the long term)
- Focus on fulfilling customer preferences
- Focus on investments
—> maximising short term profit can conflict with need for continuity
—> Profit is however needed for continuity: only with profit a company will have the
required financial resources to survive independently
Company Non-profit organistion
- Focus on maximising profit - Focus on providing facilities
- Economically independent - Not economically independent
- Market mechanism = a mechanism by which the - Public sector: budget mechanism = the use of
use of money exchanged by buyers and sellers money raised by compulsory contributions (tax)
tends to optimise distribution of goods and to provide public goods and services
services. - Private sector: fundraising
- Activities are means to achieve the goals - Activities are goals at itself
- Efficiency and effectiveness measured by profit - Effectiveness measured by non-financial criteria
1
, • Business activities, classified based on the nature of the transformation process:
- Agriculture and mining: with a small quantity of commodities, a large quantity of end
product is achieved. Assets are important to this sector.
- Industry (manufacturing):
- Job production: customised, made for one specific customer, made to order
- Mass production: standardised, made for the market, made for stock
- Batch production: every customer gets an individual product, but costs are saved
by producing the components in larger quantities.
- Trade: no transformation process, but existence is derived from the imbalance between
production and consumption.
- Retail trade: supplies directly to the end user
- Wholesale trade: purchases from manufacturer and redistributes good among
retail trade.
- Services: no process of manufacturing or redistributing products. No/hardly any raw
material is needed. Tangible assets are needed, but most of the costs are based on labor.
• Legal form/entity = a company or organisation that has legal rights and responsibilities.
Aspects of the choice of a legal form:
- Management and ownership
- Financing possibilities
- Continuity: how can the company continue in the case of a change?
- Liability: who is held financially liable
- Tax consequences
- Disclosure of financial information (= having to show the financial results publicly)
Type of Legal Separate Financing Continuity Liability Fiscal Discl
company entity control & with private position osure
status owner assets requi
reme
nts
Sole No No Deposit Stands/falls Fully liable Box 1: No
proprietorship private assets with owner income tax
by owner
Partnership No No - Deposit Departure Several Box 1: No
private assets partner liability income tax
by partners compensated (equal
- Acquisition by other share)
of partner - conflicts
share
Limited No Yes - Deposit Lower General p: Box 1: No
Partnership private assets conflict risk: several income tax
- Acquisition capital liability.
of business attracted w/o Limited p:
share adding a only over
leader contribution
LLC Yes Yes New issue of Independent Limited to Corporate Yes
shares to existence, amount of tax
current but when contribution
shareholders manager/ of private Share
shareholder assets holders:
strong Income tax
dependency
PLC Yes Yes New issue of Independent Limited to Corporate Yes
shares existence as amount of tax
legal entity contribution Share
holders:
income tax
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