Summary lecture slides 1CV10
Lecture 1
Overview of economics
Economic behavior
• Individual has a limited number of resources to satisfy essentially unbounded needs ->
scarcity.
• Old days: payment in kind (ruil in natura)
• Later: money generally accepted
There are some basic principles dealing with this economic behavior.
Ten economic principles:
1. People face tradeoffs
2. The cost of something is what you give up to get it
3. Rational people think at the margin
4. People respond to incentives
5. Trade can make everyone better off
6. Markets are usually a good way to organize economic activity
7. Governments can sometimes improve market outcomes
8. A country’s standard of living depends on its ability to produce goods and services
9. Prices rise when the government prints too much money
10. Society faces a short-run tradeoff between inflation and unemployment
Levels:
• Microeconomics: individual level (Principles 1-7):
o Consumers and produces (behavior)
o Market structures: monopoly, oligopoly, monopsony, perfect competition (depends
on number of consumers/producers)
• Macroeconomics: ‘national’ level (Principles 8-10):
o Aggregated decisions: consumers, producers
o Inflation, interest, (total) export, (total) import, national income, money supply
• Business economics: company level
What is a company?
- Company is the dotted box
- Market for buyers and suppliers
- Product stream goes from left to right
- Payments take place from right to left
- In between there is a government and capital market
(distributing cash)
Differences financial and management accounting:
, Major differences Financial accounting Management accounting
Nature of reports produced Available for everyone Available for manager
Level of detail Broad Specific
Regulations There are regulations No regulations
Reporting interval Interval No interval, made whenever needed
Time orientation Looks back Looks back or forward
Range and quality of information Financial objectives Qualitative aspects
Financial Accounting: Atrill and McLaney CH. 1-2
Accounting is about collecting, analyzing and communicating financial information.
➔ Who uses this information? Stakeholders, investors, banks/creditors, government, suppliers
They use the information to base their decisions.
Financial statements – Objects of financial reporting
• Balance sheet (statement of financial position)
Specific moment in time
o Wealth
o Cash position
• Profit and loss account (income statement)
Period
o Change in wealth over period
• Cash flow statement (statement of cash flows)
Period
o Change in cash over period
Example
- Paula sees business opportunity: selling chocolate bars. She began the venture with 50 euro
in cash. On the first day of trading, she purchased chocolate bars for 30 euro and sold two-
thirds of her inventories for 35 euro cash.
- Starting point cash = 50 euro, total assets = 50 euro, equity = 50
- What cash movements took place during the first day of trading?
Closing balance of cash = opening balance + cash from sales – cash
paid for purchase goods
- How much wealth was generated by the business during the first
day of trading?
Wealth = incoming cash – costs of goods sold
- What is the accumulated wealth at the end of the first day?
Equity = closing balance + inventories
(inventories = purchasing costs – cost of goods sold)
o New equity (65) is sum of old equity and profit (50 + 15)
o New cash (55) is sum of old cash and change in cash
,Example
• Each statement provides a part of picture of financial performance and position of business
• Cash is a vital resource that is necessary for any business to function effectively -> statement
of cash flows
• But changes in cash do not give insights into the profit generated -> income statement
• Statement of financial position -> insights in the total wealth
Statement of financial position: vertical layout
Equity (eigen vermogen) = possession/claim of owner on
company
- Equity = assets – liabilities
- Assets = liabilities + equity
Statement of financial position: horizontal layout alternative horizontal layout
Assets: assets = liabilities + equity
• Resource with certain characteristics:
o Probable future economic benefit must exist
o Business must have exclusive right to control benefit
o Benefit must arise from some past transaction or event
o Asset must be capable of measurement in monetary terms
• Different categories:
o Current vs. non-current (fixed)
Non-current assets:
- Historic value approach: asset value = historic costs – depreciation (Net book
value)
- Fair value approach: asset value = current market value (Fair value)
- Impairment of non-current assets: if Net book value > Fair value, then:
asset value = Fair value
Current assets:
- Same rules apply except there is no depreciation
o Tangible (it is physical there) vs. intangible
• Examples: accounts (trade) receivable, plant, inventories, cash
Claims: obligations on the part of business to provide cash, or some other benefit, to outside parties
• Two types:
o Equity (owner’s claims)
o Liabilities (other’s claims)
- Current
- Non-current
• Examples: accounts (trade) payable, long-term debt, long-term trade credits
, Management Accounting: Wouters, Selto, Hilton, Maher CH. 1-3
Management accounting: “arithmetic” for managers to manage/steer a company
- Evaluate (how am I driving?)
- Action (what am I going to do?)
Decision making framework
1. Setting goals and objectives
2. Gathering information
3. Evaluating alternatives
4. Execution and tracking costs
5. Obtaining feedback
Characteristics of cost-management analysts
Cost is the sacrifice made, measured by value of resources given up, to achieve a particular purpose.
• Cash or out-of-pocket cost – incremental money price paid
• Accrual cost – historical measure of resources used (e.g. inventories cost)
• Opportunity cost – highest foregone alternative value of used resource
Various points of view
- Allocating costs (difference purchase and selling price)
- Cost behavior
- Relevant costs for decision making, …
The different goals of using costs result in
various cost classifications
