(See related pages)
|
|
|
How much should society emphasize producing food versus developing a cure for cancer? Should we devote more time and energy to making computers or cars? Should you invest your money in IBM or General Motors? Accounting provides information that is useful in answering such resource allocation questions. Market-Based AllocationsSuppose you want to start a business. You may have heard “you have to have money to make money.” In fact, you will need more than just money to operate a business. You will likely need such resources as equipment, land, materials, employees, and so on. If you do not have these resources, how can you get them? In the United States, you would compete for resources in open markets. A marketGathering of people or organizations for the purpose of buying and selling resources. is a group of people or entities organized to exchange things of value. The market for business resources involves three distinct participants: consumers, conversion agents, and resource owners. Consumers are resource users. Resources, however, are frequently not in a form that consumers want. For example, nature provides trees but consumers want furniture. Conversion agents (businesses) transform resources such as trees into desirable products such as furniture. Resource owners control the distribution of resources to conversion agents. Resource owners expect rewards for providing resources to conversion agents. Conversion agents (businesses) can reward resource owners because the transformation process adds value to the resources they obtain. The outputs (goods and services) are more valuable than the inputs (resources) because they are more useful to consumers after transformation. For example, a house is more valuable than the materials and labor used in its construction. Labor or materials alone do not provide shelter. By transforming labor and materials into a house, the conversion agent produces an output (a house) more valuable than the sum of the inputs (labor and materials). A house that cost $220,000 to build could have a market value of $250,000. Common terms for the added value created in the transformation process include profitValue created by transforming goods and services to more desirable states., incomeAdded value created in transforming resources into more desirable states., or earningsThe difference between revenues and expenses. Same as net income or profit. Accountants measure the added value as the difference between the cost of a product or service and the selling price of that product or service. For example, the profit on the house described earlier is $30,000, the difference between its $220,000 cost and $250,000 market value. Conversion agents who successfully satisfy consumer preferences efficiently (at low cost) are rewarded with high earnings. These earnings are shared with resource owners, so conversion agents who exhibit high earnings potential are more likely to compete successfully for resources. Return to the original question. If you want to start a business, how do you get necessary resources? To get resources, you must go to open markets and convince resource owners that you can produce profits. To summarize, resource owners, conversion agents, and consumers create open markets. The resource owners and conversion agents supply goods and services in response to consumer demand. Consumers motivate resource providers and conversion agents to satisfy their demands by paying prices that result in profits. As a result, consumer demand determines the allocation of resources. Exhibit 1–1 illustrates the market trilogy involved in resource allocation. The following section of the text discusses specific types of resources that businesses commonly use to satisfy consumer demand. Financial ResourcesConversion agents need financial resourcesMoney or credit arrangements supplied to a business by investors (owners) and creditors. (money) to establish and operate their businesses. Investors and creditors are two primary providers of financial resources. InvestorsCompany or individual who gives assets or services and receives a security certificate in exchange. provide resources in exchange for ownership interests in a business. Ownership interests entitle investors to share in the distribution of income. If a business prospers, investors can receive handsome rewards. If it fails, investors can lose the resources they provided. Investors allocate resources to businesses based on their assessment of how profitable they expect a business to be. CreditorsIndividual or institution that has loaned goods or services to a business. provide financial resources to businesses on a lending basis. Instead of accepting the risks and rewards of ownership in a business, creditors expect businesses to repay borrowed resources at a future date. If a business fails, any resources (assets) it still has are returned to the resource providers (investors and creditors). The process of dividing remaining assets and returning them to resource providers is called business liquidationProcess of dividing up the assets and returning them to the resource providers. Creditors normally receive first priority in business liquidations; in other words, assets are distributed to creditors first. After creditor claims have been satisfied, the remaining assets are distributed to the investors (owners) of the business.. Normally, creditors have a priority claim on assets in business liquidations. In other words, assets are distributed to creditors first. After creditor claims have been satisfied, any remaining assets are distributed to investors (owners). Suppose a business acquired $100 cash from investors and $200 cash from creditors. Assume the business lost $75 and returned the remaining $225 ($300 – $75) to the resource providers. The creditors would receive $200; the owners would receive only $25. If the business lost $120, the creditors would receive only $180 ($300 – $120); the investors would receive nothing. In other words, both creditors and investors can lose resources when businesses fail. Creditors, however, are in a more secure position than investors because their resources are returned first. Because of their more secure position, creditors normally do not share business profits. Instead, they receive interestFee paid for the use of borrowed funds; also refers to revenue from debt securities., which is a fixed fee based on the amount of resources provided. Creditors prefer to lend financial resources to businesses (conversion agents) with high earnings potential because such companies are more likely to pay interest and are less likely to experience bankruptcy and liquidation. Also, less risky (high earning) companies can borrow at lower interest rates because creditors are more confident that such companies will be able to satisfy their obligations. Physical ResourcesIn their most primitive form, physical resourcesNatural resources used in the transformation process to create resources of more value. are natural resources. The process of transforming natural resources can include several stages and numerous independent businesses. One conversion agent’s output becomes another’s input. For example, most furniture makers do not produce lumber. They use wood purchased from sawmills to make their products. The sawmills likely bought harvested logs from the timberlands’ owner. Physical resources, therefore, are natural resources that could be at different stages of transformation. Owners of physical resources seek to sell those resources to profitable businesses because profitable businesses are more likely to be able to pay for them. The ability of a business to add value (produce income) in the conversion process is the basis for allocation of physical as well as financial resources. Labor ResourcesLabor resourcesBoth intellectual and physical labor used in the process of converting goods and services to products of greater value. include intellectual as well as physical labor. Like other resource providers, workers seek relationships with businesses (conversion agents) that have high earnings potential because these businesses are better able to provide rewards (pay high wages). Accounting Provides InformationHow do resource owners (financial, physical, and labor) identify those conversion agents (businesses) with the high profit potential to pay competitive prices for the resources? This is where accounting enters the picture. Accounting provides information useful in evaluating a conversion agent’s profit potential and relative risk. Accounting plays a major role in determining how resources are assigned to conversion agents. Types of Accounting InformationExternal resource providers, such as investors and creditors, are viewed as entities separate from the business. Accounting information focused on the needs of these external users is called financial accountingAccounting information designed to satisfy the needs of an organization’s external users, including business owners, creditors, and government agencies.. Another branch of accounting, managerialBranch of accounting that provides information useful to internal decision makers and managers in operating an organization., provides information useful to managers and employees who work inside a business, internal users. The information needs of external and internal users frequently overlap. For example, both external and internal users are interested in the amount of income a business earns. Managerial accounting information, however, is usually more detailed than financial accounting reports. Whereas an investor is interested in whether Wendy’s or Burger King produces more overall income relative to risk, a Wendy’s regional manager is interested in the store-by-store earnings of the restaurants she controls. In fact, a regional manager is also interested in nonfinancial measures, such as the number of employees needed to operate a restaurant, the times at which customer demand is high versus low, and measures of cleanliness and customer satisfaction. Nonbusiness Resource AllocationsThe United States economy is not purely market based. Many factors other than profitability affect the allocation of resources. For example, governments allocate resources for national defense, the redistribution of wealth, or environmental protection. Foundations, religious groups, the Peace Corps, and various benevolent organizations allocate resources based on humanitarian concerns. Other groups allocate resources to support art, music, dance, and theater. Like profit-oriented businesses, these organizations also add value through resource transformation. For example, a nonprofit soup kitchen adds value by converting raw meats and vegetables into desirable meals. The consumers who eat at a soup kitchen, however, are unable to pay the kitchen’s operating costs, much less for the added value the soup kitchen provides. The soup kitchen’s motivation is to meet humanitarian needs, not to earn profits. Organizations that are not motivated by profit are called not-for-profit entitiesOrganizations (also called nonprofit or nonbusiness entities) whose primary motive is something other than making a profit, such as providing goods and services for the social good. Examples include state-supported universities and colleges, hospitals, public libraries, and public charities. (also called nonprofit or nonbusiness entities). The absence of a profit motive by no means negates the need for accounting information. The accounting system can measure the cost of the goods and services a not-for-profit organization provides, its efficiency and effectiveness in providing goods and services, and its ability to continue to provide goods and services. This information is useful to a host of stakeholders, including taxpayers, contributors, lenders, suppliers, employees, managers, financial analysts, attorneys, and beneficiaries. Accounting serves the information needs of a variety of business and nonbusiness user groups. Although Exhibit 1–2 shows three distinct areas of accounting, these areas frequently overlap. For example, managers of all types of organizations use managerial accounting information. |
