Accounting 1: Introduction

What are the basic components of institutional structure?

stakeholders, contributions, and rewards/benefits.

How are the basic components of institutional structure connected?

All core stakeholders receive rewards which are considered fair based on their contributions

What is important about core stakeholders?

They share the values, objectives, governance and organization of the firm

What three things are corporate organizations characterized by?

• transferability (some degree of openness)

• autonomous existence

• durability

What is economic stability?

the ability to remain economically sustainable over time

In order to have autonomy and durability what do firms need?

economic stability (to keep autonomy over time and ensure durability)

What does fairness of remuneration of input ensure?

resources used are compensated fairly

What are the two fairness of remuneration of input ensure?

Labor and capital (fair return to who provided capital)

What is cash equilibrium?

The idea that when short-term profitability is lacking, firms use debt to cover costs, however, debt generates financial charges and increased corporate risk.

What is solvency?

the firm’s ability to cover debt at any moment

What is income equilibrium?

the ability of a firm to generate enough revenue to cover its costs over time

What is financing and why can it be bad?

Financing is the process of obtaining money (funds) to pay for a company’s activities. Those loans generate interest and create financial charges

Why do firms need financing?

Because firms incur costs before revenue.

What does income equilibrium depend on?

• Entity: single-firm vs group firms

• Time frame: short run vs long run (short term loses may be acceptable if profitable in the long run)

What is profitability?

An indicator of a firm’s ability to cover negatives with positives without third party support.

What does the Profit and Loss account (income statement) measure?

The gains and losses from operations over a period of time (costs and revenues).

What is the Balance Sheet?

A snapshot of the assets used and funds related to these assets at a specitif time.

What is the cash-flow statement and what does it link?

a report of the inflow and outflow of cash. Links important elements of the income statement and balance sheet

What is equity in the balance sheet?

Funds provided by people

What are liabilities in the balance sheet?

funds owed to others

Is the Profit and Loss account (income statement) linked to profitability of solvency?

profitability

Is the Balance Sheet linked to profitability of solvency?

both

Is the cash-flow statement linked to profitability of solvency?

solvency