Economic Environment: Production, Distribution

The Economic Environment and the Need for Economic Information

• Market globalization and increasing interdependence of economies across nations are key factors.
• Private ownership of production and the role of entrepreneurs are vital for creating wealth.
• Businesses and organizations are primarily profit-oriented.
• Fast decision-making, driven by technological advancements, and market competition is essential.
• Economic uncertainty arises from global market fluctuations, inflation, and policy shifts.
• Economic activity involves the organized use of resources like labor, capital, and raw materials for production of goods and services.
• Distribution involves the network and processes to make these goods and services available, including supply chains and logistics.
• Consumption refers to the utilization of goods and services to satisfy human needs, affecting demand and economic cycles.
• Economic units include enterprises that produce goods, contributing to economic growth and employment.
• Consumers, both individuals and organizations, drive market demand by purchasing goods and services.
• The public sector manages resources, regulates markets, and provides public services.
• Economic transactions involve exchanges between economic actors, including financial transactions like payments and real transactions like sales.
• Resource allocation and investment decisions depend on the economic and monetary flow in a market economy.

Accounting as an Information Tool

• Accounting systematically records, processes, and reports financial information to stakeholders.
• It provides an accurate view of business operations, financial health, and performance.
• Accounting helps businesses track income, expenses, assets, and liabilities for informed decision-making.
• It supports financial planning, investment analysis, and risk assessment.
• Key objectives are facilitating value creation through efficient resource utilization and measuring performance through structured reporting.
• Financial information assessment evaluates an organization's economic position via its financial statements.
• It assesses the ability to obtain future cash flows, financial stability, and growth potential.
• It measures the effectiveness of business strategies, budgeting, and resource allocation.
• It provides transparency to investors, creditors, and regulators for compliance.

Characteristics and Requirements of Accounting Information

• Relevance means that financial data must significantly influence economic decisions.
• Reliability requires information to be free from material errors, neutral, and complete, ensuring credibility.
• Comparability means using consistent accounting standards over time and across businesses for analysis.
• Clarity demands that reports must be easily understandable and structured for decision-making by non-experts.
• Identifiability means that information must refer to specific economic entities and time periods.
• Timeliness means that financial reports must be promptly prepared and disclosed.
• Verifiability means there must be documentary evidence for review and auditing.

True and Fair View Principle

• Financial statements should accurately and completely represent a company's financial health.
• Investors, creditors, and management can use these statements to assess performance and risks.
• Accounting practices should be efficient without excessive complexity (cost-benefit balance).
• Financial records must reflect reality with reasonable accuracy.
• Financial data should be unbiased, avoiding manipulations or misrepresentations (impartiality and objectivity).

Users of Accounting Information

• Owners and shareholders need financial reports to evaluate profitability, growth, and investment returns.
• Managers and executives strategize, budget, and optimize resource allocation using accounting data.
• Employees rely on financial stability and performance reports for job security, salaries, and benefits.
• Investors and analysts rely on financial statements to decide on investments.
• Creditors and lenders evaluate creditworthiness and ability to repay loans.
• Suppliers and business partners use financial insights to gauge a company's reliability.
• Government agencies use accounting data for taxation, regulation, and economic policy.
• Consumers and competitors assess financial strength, product pricing, and market trends.
• Shareholders monitor company performance and profitability, and financial institutions evaluate risk before granting loans.
• Suppliers and partners assess reliability and financial strength, and public administrations ensure regulatory compliance and tax collection.
• Regulatory agencies monitor financial transparency and fair market practices.
• Labor unions advocate for employee rights based on company financial health, and the general public gains insights into corporate social responsibility and sustainability.

Definition and Classification of Accounting Types

• Accounting provides a structured method to study financial performance and economic behavior as an empirical science.
• Accounting develops systematic knowledge to support financial management, forecasting, and decision-making.
• Financial accounting is a record of financial status and transactions for external stakeholders.
• Cost (managerial) accounting helps to analyze costs and optimize internal business operations.
• Forecasted accounting plans future financial activities and sets performance targets.
• National accounting guides economic policy, taxation, and government budgeting at a country level.
• Supranational accounting uses standardized financial reporting frameworks by global organizations.
• Public accounting manages governmental financial records and budgets.
• Private accounting is useful in businesses, NGOs, and non-profits for financial tracking and decision-making.
• Accounting consolidation aggregates financial data from corporate groups to assess group-wide financial health.
• Auditing provides independent evaluation of financial statements to ensure accuracy and regulatory compliance.
• Financial statement analysis evaluates company performance, profitability, and investment potential.

Business Net Assets and Balance Sheet

• A company's net assets include all goods, rights, and obligations expressed in monetary terms.
• These assets and elements are essential for operations.
• Formula: Net Assets = Assets + Rights – Obligations, or Assets = Equity + Liabilities.
• Understanding net assets allows assessing financial health and making strategic business decisions.

Balance Sheet Overview

• A balance sheet summarizes a company's financial position at a specific point in time.
• Balance sheets display assets, liabilities, and equity, providing a financial snapshot.
• A balance sheet shows how resources are allocated and financed.
• The balance sheet helps investors, creditors, and management assess the company's performance.
• Balance sheets identify financial trends and liquidity conditions over time.

Business Net Assets: Assets, Liabilities, and Equity

• Assets are items that belong to a company used for production or sale, and can be tangible, financial, or intangible.
  • Tangible: Buildings, land, machinery, goods, and raw materials.
  • Financial: Bank deposits, investments.
  • Intangible: Patents, trademarks, and goodwill.
• Rights are Legal claims that allow the company to collect money from third parties.
  • Accounts receivable from customers.
  • Deposits held in banks.
  • Rights to use intellectual property.
• Obligations are Legal commitments requiring the company to settle debts.

Liabilities

• Represent financial obligations to external parties, requiring future payments.
  • Non-Current Liabilities: Long-term obligations such as bank loans and bonds.
  • Current Liabilities: Short-term obligations such as accounts payable, salaries payable, and taxes.
• Managing liabilities is crucial for solvency and creditworthiness.

Equity

• Equity: Owners' residual interest in a company after deducting liabilities from assets.
  • Initial Capital: Money invested by owners or shareholders.
  • Retained Earnings: Reinvested profits.
  • Reserves: Funds for future growth, expansion, or contingencies.

Economical and Financial Structure

• Economic Structure (Assets): Represents allocation of resources to sustain operations and generate profits, and reflects investments in fixed and current assets.
• Financial Structure (Liabilities and Equity): Determines how a company finances assets through internal or external funding.
• Balance: The financial structure ensures optimal capital management and business sustainability.
• The Fundamental Equation of Equity: Assets = Equity + Liabilities
• The equation highlights the need for balance in financing.

Classification of Assets and Liabilities

• 4.1 Classification of Assets
  • Non-Current Assets: Long-term investments.
  • Current Assets: Short-term resources.
• 4.2 Classification of Liabilities
  • Non-Current Liabilities: Debts with maturity dates extending beyond one year.
  • Current Liabilities: Short-term obligations due within a year.

Economic Structure: Assets

• Include resources expected to provide long-term value.
  • Intangible assets: Software, patents, brand recognition.
  • Tangible assets: Factory buildings, heavy machinery, vehicles.
  • Long-term financial investments: Equity stakes in other businesses, government bonds.
• Represent assets easily converted into cash within one year, including inventories, accounts receivable, and cash and bank balances.
• Non-current assets remain with the company long-term, impacting business operations.
• Current assets are those converted to cash in a year and are essential for liquidity and daily support.
• Financial structure is related to Liabilities and Equity.

Balance Equilibrium

• Maintaining balance between assets and liabilities ensures financial stability, reflected in Working Capital (Current Assets - Current Liabilities).
  • Max Equilibrium: Fully financed by equity.
  • Normal Equilibrium: Mix of equity and liabilities.
  • Negative WP: financial distress.
  • Bankruptcy: Liabilities exceed assets.

Measurement Standards

• Assign monetary values to assets and liabilities ensures the accuracy of the financial records and reporting.
  • Historical Cost: Purchase price.
  • Fair Value: Current market value.
  • Net Realizable Value: Sales price after deductions.
  • Present Value: Discounted future cash flows.
  • Value in Use: Asset's potential revenue generation.
  • Amortized Cost: Adjusted costs that take depreciation, or use, into account.

Balance Sheet Analysis and Interpretation

• A balance sheet is useful for:
  • Assessing financial health to evaluate liquidity and solvency
  • Analyzing asset efficiency in order to determine profitability

Practical Applications of the Balance Sheet

• Balance sheets are useful for:
  • Help with making financial decisions
  • Present data to creditors and investors for financial planning
  • Risk management for sustainable growth

How the Accounting System Works: The T-Accounts

Concept and Definition of a T-Account

• A T-account displays the initial situation, economic flows affecting it, and the final situation of an accounting element such as an asset, liability, equity, expense or income.
• Functions as the main tool to organize this accounting data.

Graphic Representation and Terminology of T-Accounts

• T-accounts have 2 sides.
  • Left Side (Debit): Increases to assets and expenses.
  • Right Side (Credit): Increases to liabilities, equity, and income.
• Rules for Balance:
  • If total debits exceeds total credits --> Debit Balance
  • If total credits exceeds total debits --> Credit Balance
  • If total debits equals total credits --> Zero Balance

Types of T-Accounts

• Classification by representation:
  • Asset, liability, equity, income, and expense accounts are represented.

Classification by Function

- (Balance Sheet Accounts) represent Situation Accounts like assets, liabilities, and equity.

• Management Accounts show effects of profit or loss.
• Administrative accounts adhere to standard valuation rules.
  • Speculative accounts use variable valuation methods.

Coordination of T-Accounts: Debit and Credit Theories

• Accounts must retain initial balance over time.
  • A + EXs = L + EQ + Is

The Accounting Entries: Definition and Types

Accounting Entry

• An entry is a record of business transactions in the Journal Book, recorded and entered chronologically.

Types of Entries

• A Simple entry affects one debit and one credit account.
• A Compound entry affects multiple debit or credit accounts.

Interpreting Accounting Events

  - Accounting Events are financial transactions.
  - Types of Accounting Events: Permutative, Modifying, and Mixed.

The Accounting Method and the Double-Entry Principle

• Collect Data.
• Process w/ double entry method.
• Measure and value, record, and aggregate data.

Double-Entry Principle:

A business transactions affects and changes at least two accounts.

8. The Equity Variations Derived from Accounting Events

• Transactions can change financial structure
  • Equity is the growth!
  • Increased equity = Profit!
• The Income Statement reflects company performance.

Subunit 4

1. Legal Regulation of Accounting

1. 1. Legal Framework- Accounting regulations ensure accuracy of financial information by defining acceptable practices. -Accounting regulations ensure accuracy of financial information by defining acceptable practices. -Commercial Code: Articles 25-49 regulate business accounting practices. -Capital Companies Law: Contains multiple references to accounting requirements. -General Accounting Plan (PGC) & Sectorial Adaptations: Establish accounting principles in Spain. -ICAC Resolutions: Guidelines from the Accounting and Auditing Institute. -Audit Law: Governs financial auditing processes. -IAS/IFRS: International accounting standards for global harmonization.

- 1.2 Evolution of Accounting Regulation

Until the 70's there were inconsistencies with regulation, a change in 1990 meant that EU mebership led to alignment.

Accounting Books: Necessary, Mandatory, and Auxiliary Books

• Fundamental Accounting Books: Required for compliance. -Journal Book (Libro Diario): Chronological record of all business transactions. -General Ledger (Libro Mayor): Summary of transactions by account type.

Mandatory Books under the Commercial Code

• The Commercial Code (Articles 25-33) requires: -Journal Book: Records transactions daily, allowing grouped entries up to a month. -Inventory Book and Annual Accounts: Includes the opening balance, periodic trial balances, and annual financial statements. -Minutes Book: Required for commercial companies, recording resolutions from corporate meetings. -Businesses must submit these books to the Mercantile Registry and maintain them for six years.

Additional Voluntary and Auxiliary Books