Market and Business Cycle PDF

FUNDAMENTALS OF ACCOUNTING M ACCOUNTING ENVIRONMENT L BUSINESS AND ACCOUNTING T Market and Business Cycle Learning Objectives At the end of the lesson, the learner should have the following skills and abilities: Topic.1 Society,...

FUNDAMENTALS OF ACCOUNTING M ACCOUNTING ENVIRONMENT L BUSINESS AND ACCOUNTING T Market and Business Cycle Learning Objectives At the end of the lesson, the learner should have the following skills and abilities: Topic.1 Society, business and the  Articulate the relationship between business freedom of enterprise and society.  Explain the value of the free enterprise system in a market economy.  Expound the interesting building blocks in a market economy.  Critically analyze the relationships among resources, products, and industries. Topic.2 Business activities,  Compare the normal business model with business operating cycle the strategic business model. and the functions of  Discuss the normal business cycle and its stewardship operating activities.  Discuss the difference and relationship between fiduciary and proprietary functions of business. Topic.3 Business recording,  Integrate the overriding value of business reporting and decision- transactions. making  Explain the connection of records, information, and decision-making. Topic.4 Accounting and the  Understand the societal importance of other fields of arts and accounting. sciences  Explicate the relationship of accounting with other related fields of discipline.  2 Accounting Environment.Business and Accounting.Market and Business Cycle M1.L1.T1 Society, Business and the Freedom of ML 1 Enterprise 1.0 The Freedom of Enterprise in pursuit of Happiness Man is created to flourish in his world. His enterprise will lead him to understand desire and pursue happiness. His activities in pursuit of happiness will result to creation of wealth made within the portals of values crafted with his fellowmen, in there society. 1.1 Society and economic activities A society is an association of men brought together by common traditions, beliefs, values, purposes and actions. Organizations Men work The association of men is called an organization. Men organize themselves together in line in groups. with their orientation and interests. Their orientation and interests may be bonded by their traditions. These are men’s practices, stories, dreams, hopes, and longings molded by their continuity of existence that serve as the basis of their beliefs. Organizational values Beliefs are mental orientation of man’s understanding, or lack of understanding, of an event or happening. These beliefs are the foundations of man’s purposes and actions. Examples of Men have Filipino beliefs are the existence of God, respect to one’s self, respect to the national flag, group belief to the foundation of laws, belief to one’s ability to withstand trials and difficult struggles norms. in life. Values are expressions of beliefs. Some of the Filipino values are respect to elders, courtesy, hospitality, industry, truthfulness, honesty, to name a few. An association of men must have a purpose to accomplish. Examples of societal purposes are to defend societal interest against invaders, to struggle for survival and supremacy, and to help those who are in need. The actions of an organization are influenced by its traditions, beliefs, values, and purposes. The biggest society is the world society. Based on the data posted in www.prb.org, on its World Population Data Sheet 2012, the world is composed of about 7.058 billion individuals dispersed across our planet in the following continents:  3 Accounting Environment.Business and Accounting.Market and Business Cycle M1.L1.T1 Table 1.01 – World Population In each of these continental societies are the national societies Regions Population (in (eg, The Philippines society, Hong Kong society, Japanese millions) society, American society, etc.) And in each of the national societies are sub-societies of men who are particularly attracted Asia 4,260.0 together by their domestic interests and likeness (eg, Philippine Americas 948.2 Institute of Certified Public Accountants, Philippine Dental Europe 740.1 Society, Philippine National Red Cross, Philippine Basketball Association, Rotary Club of Mandaluyong, etc.). In our modern Oceana 37.0 world, international organizations exist not only in the area of Africa 1,072.3 professional practice, sports, religion, environmental protection, Total 7,057.6 but in the field of business as well (eg, Philippine Chamber of Commerce and Industry, Filipino-Chinese Chamber of Commerce, Philippine Retailers Association, etc.) Society and economy Group The stability and growth of a society are enormously influenced by its economic activities. The economics society’s economic activities are shaped by its political philosophies, military training, religious matter. beliefs, cultural orientations, educational system, psychological foundations, and other value systems. The economic activities comprise the society’s economy. In turn, the economy greatly steers growth, decline, and fundamental changes in a society. 1.2 The Building Blocks in a Market Economy The strengths and directions of a society are structurally influenced by its political ideology and economic model. In a market economy, its building blocks comprise the democratic system, the freedom of enterprise and the market exchanges. Democracy Fig. 1.1 – Market Building Blocks Freedom to In democracy, the government follows the principles of dream! capitalism where each individual in the society enjoys the freedom to dream big, express talents, harness skills, and make things done within the bounds of morals, ethics, and legal standards. In this course, we use the word society to mean democratic society where a person has the right and opportunity to choose what course in life he would like to take. A person also has the freedom on how to exercise his economic power (such as on what item to spend their money), on how to use his skills and talents, and even at what time he wants to work for a  4 Accounting Environment.Business and Accounting.Market and Business Cycle M1.L1.T1 living. In economics, this democratic environment is known as the market economy. This market-oriented economic environment is also called as the free enterprise system. Free enterprise system and the market place Make a The free enterprise system treats each individual as a gifted and special being who can exercise choice. his societal right to choose whatever he wants to do or not to do in his life. In this model, a person who was born a farmer has an equal chance with anybody else to be the next president of their country. A man who was born a peasant may choose to become one of the wealthiest men in town. To accomplish a dream in the free enterprise system, one has to understand the operations of the market and the market place. The market is the people and the market place is the meeting of minds between two or more persons. The people in the market place are preoccupied in getting their dreams done while subordinating their other priorities. In the process, they lack time, or perhaps they do not have the best skills, to address their other needs. This need becomes an opportunity for others to serve. When you serve to satisfy a person’s needs, you are in business! The exchange process In the market place, when you render a service you are supposed to get paid. This is how you get your share in the entire market wealth. The more money you get paid, the bigger share you have in the market. But then there would be as many possible service providers in the market place. They offer almost exactly the same as your product. To push or make a deal for your services, you have to offer something unique to attract and ultimately serve the market players. This process requires reasonable level of skills, talents, creativity, and sensitivities as to the needs and emerging needs in the market. The process of serving the market by giving something and receiving another thing in return is an exchange transaction. 1.3 Resources, products, and industries Natural resource to products Creative Resources are used in an exchange transaction. They are used in generating goods or services. thinking! A resource may be classified as natural resource or converted resource. A natural resource is one that is taken and used in its earth-based original form such as land, water, air, plant, and animals. Once these natural resources are converted into another form and use they become converted resource or processed resource. These converted resources are called products.  5 Accounting Environment.Business and Accounting.Market and Business Cycle M1.L1.T1 Products may be goods or services. They are made to satisfy man’s needs and wants. In many instances, a product is reprocessed and reconverted to another product. Product to industry Industry is The systems and technology used to convert the natural resource to products, or from one an organized product to another, or from one product location to another product location, is called system of conversion industry. processes. Below is an example of an industry classification used and developed by FTSE Group in 1984, a London-based company, to monitor macroeconomics (www.en.wikipedia.org). Table 2.0 - Industry Classification and Benchmark INDUSTRY CLASSIFICATION BENCHMARK Industry Supersector Sector Subsector 0001 Oil & Gas 0500 Oil & Gas 0530 Oil & Gas Producers 0533 Exploration & Production 0537 Integrated Oil & Gas 0570 Oil Equipment, Services 0573 Oil Equipment & Services & Distribution 0577 Pipelines 0580 Alternative Energy 0583 Renewable Energy Equipment 0587 Alternative Fuels 1000 Basic Materials 1300 Chemicals 1350 Chemicals 1353 Commodity Chemicals 1357 Specialty Chemicals 1700 Basic Resources 1730 Forestry & Paper 1733 Forestry 1737 Paper 1750 Industrial Metals & 1753 Aluminum Mining 1755 Nonferrous Metals 1757 Iron & Steel 1770 Mining 1771 Coal 1773 Diamonds & Gemstones 1775 General Mining 1777 Gold Mining 1779 Platinum & Precious Metals 2000 Industrials 2300 Construction & 2350 Construction & 2353 Building Materials & Materials Materials Fixtures 2357 Heavy Construction 2700 Industrial Goods 2710 Aerospace & Defense 2713 Aerospace & Services 2717 Defense 2720 General Industrials 2723 Containers & Packaging 2727 Diversified Industrials 2730 Electronic & Electrical 2733 Electrical Components & Equipment Equipment 2737 Electronic Equipment 6 Accounting Environment.Business and Accounting.Market and Business Cycle M1.L1.T1 INDUSTRY CLASSIFICATION BENCHMARK Industry Supersector Sector Subsector 2750 Industrial Engineering 2753 Commercial Vehicles & Trucks 2757 Industrial Machinery 2770 Industrial 2771 Delivery Services Transportation 2773 Marine Transportation 2775 Railroads 2777 Transportation Services 2779 Trucking 2790 Support Services 2791 Business Support Services 2793 Business Training & Employment Agencies 2795 Financial Administration 2797 Industrial Suppliers 2799 Waste & Disposal Services 3000 Consumer 3300 Automobiles & 3350 Automobiles & Parts 3353 Automobiles Goods Parts 3355 Auto Parts 3357 Tires 3500 Food & Beverage 3530 Beverages 3533 Brewers 3535 Distillers & Vintners 3537 Soft Drinks 3570 Food Producers 3573 Farming & Fishing 3577 Food Products 3700 Personal & 3720 Household Goods & 3722 Durable Household Household Goods Home Construction Products 3724 Nondurable Household Products 3726 Furnishings 3728 Home Construction 3740 Leisure Goods 3743 Consumer Electronics 3745 Recreational Products 3747 Toys 3760 Personal Goods 3763 Clothing & Accessories 3765 Footwear 3767 Personal Products 3780 Tobacco 3785 Tobacco 4000 Health Care 4500 Health Care 4530 Health Care Equipment 4533 Health Care Providers & Services 4535 Medical Equipment 4537 Medical Supplies 4570 Pharmaceuticals & 4573 Biotechnology Biotechnology 4577 Pharmaceuticals 5000 Consumer 5300 Retail 5330 Food & Drug Retailers 5333 Drug Retailers Services 5337 Food Retailers & Wholesalers 7 Accounting Environment.Business and Accounting.Market and Business Cycle M1.L1.T1 INDUSTRY CLASSIFICATION BENCHMARK Industry Supersector Sector Subsector 5370 General Retailers 5371 Apparel Retailers 5373 Broadline Retailers 5375 Home Improvement Retailers 5377 Specialized Consumer Services 5379 Specialty Retailers 5500 Media 5550 Media 5553 Broadcasting & Entertainment 5555 Media Agencies 5557 Publishing 5700 Travel & Leisure 5750 Travel & Leisure 5751 Airlines 5752 Gambling 5753 Hotels 5755 Recreational Services 5757 Restaurants & Bars 5759 Travel & Tourism 6000 6500 6530 Fixed Line 6535 Fixed Line Telecommunications Telecommunications Telecommunications Telecommunications 6570 Mobile 6575 Mobile Telecommunications Telecommunications 7000 Utilities 7500 Utilities 7530 Electricity 7535 Conventional Electricity 7537 Alternative Electricity 7570 Gas, Water 7573 Gas Distribution &Multiutilities 7575 Multiutilities 7577 Water 8000 Financials 8300 Banks 8350 Banks 8355 Banks 8500 Insurance 8530 Nonlife Insurance 8532 Full Line Insurance 8534 Insurance Brokers 8536 Property & Casualty Insurance 8538 Reinsurance 8600 Real Estate 8570 Life Insurance 8575 Life Insurance 8630 Real Estate Investment 8633 Real Estate Holding & & Services Development 8637 Real Estate Services 8670 Real Estate Investment 8671 Industrial & Office REITs Trusts 8672 Retail REITs 8673 Residential REITs 8674 Diversified REITs 8675 Specialty REITs 8676 Mortgage REITs 8677 Hotel & Lodging REITs  8 Accounting Environment.Business and Accounting.Market and Business Cycle M1.L1.T1 INDUSTRY CLASSIFICATION BENCHMARK Industry Supersector Sector Subsector 8700 Financial Services 8770 Financial Services 8771 Asset Managers 8773 Consumer Finance 8775 Specialty Finance 8777 Investment Services 8779 Mortgage Finance 8900 Equity/Non- 8980 Equity Investment 8985 Equity Investment Equity Investment Instruments Instruments Instruments 8990 Nonequity Investment 8995 Nonequity Investment Instruments Instruments 9000 Technology 9500 Technology 9530 Software & Computer 9533 Computer Services Services 9535 Internet9537 Software 9570 Technology Hardware & 9572 Computer Hardware Equipment 9574 Electronic Office Equipment 9576 Semiconductors 9578 Telecommunications Equipment Industry to economy Critical An industry may give birth to another industry, and then another industry, and so on. Let us thinking! take ore as an example. The ore industry gives birth to the steel industry, then the shipping industry. Further, the shipping industry is a part of the larger transportation industry, which has bearing on manpower training industry and electronics industry. A transition from one industry to another related industry is exemplified below: Table 3 – Product and Industry Transitions Industry 1 From To Industry 2 Land management Land Agricultural produce Agri-business Agri-product processing Agricultural produce Processed farm goods Food processing Agri production Egg Chicken Livestock Fishing Sea Marine products Aqua production Fishing Fish Canned fish Food processing Property management Rock Cement Cement production Threading Yarn Fabric Knitting Agriculture Trees Rubber Rubber Property management Ore Steel Steel Steel Steel Ship Ship building Agriculture Silkworm Silk Silk production Wholesaling e-load dealership e-load retailing Retailing Storage Merchandise in one place Merchandise in another Freight forwarding  9 Accounting Environment.Business and Accounting.Market and Business Cycle M1.L1.T1 Table 3 – Product and Industry Transitions Industry 1 From To Industry 2 place Savings Unsecured money Secured money with Banking earnings Basic education Unskilled person Skilled or learned person Higher education Industry and supply chain No man is an There may be as many persons wanting to participate as players in an industry. A person may island! act as a supplier of industry inputs (ie, materials), machine manufacturer, market analysts, money or capital provider, manpower training center, systems developers, or as a provider of special industrial skills such as firefighters in an oil industry. The interconnected flow of goods and services from one entity to another until the product reaches the consumer is a supply chain. Each activity in the supply chain creates employment and wealth.  10 Accounting Environment.Business and Accounting.Market and Business Cycle M1.L1.T1 Business Activities, Operating Cycle and ML 2 the Functions of Stewardship 2.0 Business activities Business innately evolves from man’s needs. It is the market and meeting this need is the marketplace. Activities performed to meet the market needs purposely for profit are called business activities. In a market economy, people are inherently encouraged to produce goods and services that would meet the needs in the market place. This service orientation necessitates activities resulting to business transactions and events to satisfy the needs, wants, pleasantries, vanities, luxuries, and sensualities of men. In a larger perspective business transactions and events are affected by conditions besetting an economic environment. 2.1 Business transactions Transactions are exchanges in values entered into by at least two independent parties, the buyer and seller, to carry on their economic objectives. Say, Mr. X buys from Mr. Y a set of computer for P30,000. Mr. X agrees to pay an amount of money for the computer because it could benefit him in his work. Mr. Y, presumably a merchant, is selling the computer for profit. Business is When an independent buyer and seller undertake an economic exchange, it is presumed they exchange are driven by commercial benefit from it. This gives rise to the business aspect of the with exchange. That is, whenever there is an exchange of resources between knowledgeable and commercial benefit. willing persons, there is business. This exchange of resources is called business transactions. Business transactions are exchanges of values. Fig. 1.0 Normal Business Transactions People enter into transactions because they benefit from it. For example, a buyer purchases a dress because he benefits from its comfort which would make him look more presentable and smart that may be a vital factor in closing a deal. The  11 Accounting Environment.Business and Accounting.Market and Business Cycle M1.L1.T1 seller of the dress disposes his goods because he gets back his cash and also makes profit by selling his dress at a price higher than its cost. He needs the cash to pay his employee salaries, rental, electricity, and other expenses. He needs profit to sustain the accelerating demand for his goods resulting to an increased need to extend credit to new customers, spend for more promotions, buy additional machines and equipment, hire new employees, pay higher electricity costs, and many more. 2.2 Events and conditions Events are undertakings to make things happen, such as doing a process or completing a task Business is without involving an external party. Examples of events are moving a good from the sensitive to warehouse to the selling department, or sending an employee for training. changes in its environment. Conditions are situational representations of circumstances, both present and future, that may contribute in accomplishing or not accomplishing an economic transaction or event, or in determining the reasonable valuation of an item. Examples of conditions are technological changes affecting the salability of a good, disruption in production activities due to labor unrest, or replacement of operating managers. Events and conditions affect our lives, thoughts, actions, accomplishments, and future. Events and conditions affect business. 2.3 Business operating models The process of creating and accumulating wealth needs a model. A model is a frame of mind serving as the basis on how to do the right thing. Business models have been developed over the age of civilization. These models focus on what the market needs and wants, on what the businessman can do to meet the demand in the market, and who controls the market. There are two players in the market – the buyer and the seller. The seller uses its skills, technology, and money to make products while the buyer uses his money, an economic power, to buy the product and make him happy. Ideally, the buyer and the seller equally control the market. But there are times where the seller dominates the market while in other times the buyer controls the market. Normal business cycle For many centuries the market is dominated by the producers. Normal They produced goods and services based on their technology, business model systems, and designs, without bothering on what the buyer really makes money! needs. They opined that buyers would subscribe to whatever  12 Accounting Environment.Business and Accounting.Market and Business Cycle M1.L1.T1 product they would make available in the market. This model is “seller’s market” where the seller substantially controls the market place. Essentially, this means the seller uses money to produce goods or services, for distribution to customers, and consumption of the buyers. This is known as the “normal economic cycle”. Under this business model, the seller has the following activities: Fig. 2.0 Normal Economic Cycle Finance First, the seller uses money, from his savings or borrowings or both, to acquire machines, materials and hire men and develop methods and systems in producing goods or services. The process of sourcing out funds for business investments and growth and returning the same to the money providers is known as financing activities. Production Production is the process of converting materials into goods or services through the use of materials, machines, methods, money, and men. Distribution Once products are made, the seller has to distribute them to customers. This distribution process normally culminates in a sale. Sale is the process of transferring the rights and benefits over the products from the sellerto the buyer at a price normally higher than its cost. The price charged by a seller in a selling process is called an income. Profit or loss The processes of producing and distributing goods or services entail expenditures. The amount paid or incurred to acquire, produce, or distribute product is called as an expense. Expenses are deductions against income. If the income is higher than the expense, then there is profit. If the income is lower than the expense, then there is a loss. To illustrate, consider the following situational cases: Table 4 – Business results – profit or loss  13 Accounting Environment.Business and Accounting.Market and Business Cycle M1.L1.T1 Case 1.0. Business with profit. Case 2.0. Business at a loss. Mr. Francis buys a pair of shoes in Divisoria for Mr. Francis buys a pair of shoes in Divisoria P8,000. He returns to his community and sells for P8,000. He returns to his community and the same pair of shoes to his neighbor for offers the pair of shoes to Allan, his neighbor, P10,500 after spending for a total of P500 in for P10,500. But Allan counter offered to buy transportation. Francis makes P2,000 profit in the shoes for only P8,600 due to its poor these transactions, computed as follows: design. Francis tried but cannot sell it to others so he decided to sell the shoes to Allan Income P10,000 at the latter’s buying price. In the process, he Expenses: spent a total of P700 in transportation. Goods P8,000 Francis losses P100 in these activities, Transportation 500 (8,500) computed as follows: Profit P 2,000 Income P8,600 Expenses: Goods P8,000 Transportation 700 (8,700) Loss P (100) Normal operating cycle Fig. 3.0 Normal Operating Cycle Once the goods are sold, the seller has to make collections from customers and finally recovers his expense plus a profit from producing and distributing the goods or services. A profit indicates that his resources and equity are increased. This increase in economic resource through profit generation is basically the traditional business model of accumulating wealth known as the “normal operating cycle”. Strategic business cycle In recent years, there has been a shift in the business model, from the basic “seller to buyer market” process to a strategic model of “buyer to seller market” process. This is made possible by the massive changes in technology and unification of global markets coupled by the ever growing Fig. 4.0 Strategic Business Cycle Strategic variations in the wants, tastes, and preferences of the buyers. They now business demand for more sophisticated and unique products requiring precise, model makes detailed, and immediate attention. They demand accuracy and speed in wealth! product delivery. The buyers do not settle for less. Because of this, the new business model has shifted from the seller’s perspective to the buyer’s perspective where the seller finds what the buyer really needs and wants and delivers services exactly in accordance with what the buyer says so. The new business model is shown below: 14 Accounting Environment.Business and Accounting.Market and Business Cycle M1.L1.T1 Integrated business model Fig. 5.0 Strategic Operating Cycle In an expanded technical discussion, the seller approaches the market with the following integrating business activities: Research and development The seller is expected to make a research and know precisely what the customer needs. Next, the seller is also expected to develop products to meet the identified buyer’s needs. Design It involves the process of capturing the specifications of the customers for product fitness. This sets the pace in ensuring that activities are done right from the very start. Production Production follows design. Customer’s specifications, volume of order, and timing of delivery are considered in the production activities. Simultaneously, information materials are prepared to inform the market on the availability of the product, its uses, price, place, and other related information to make the market knowledgeable about, and generate attraction to, the product. Distribution If sales orders are received, the distribution channel should be efficiently available for quick and flexible responses to market demands. Channels of distribution include dealers, stores, supermarkets, display centers, branches, and similar places and manner where the product is being coursed through to reach the place of the customer. Post-sale services Once the delivery is made, careful observation should be done to find ways on how to improve the product and its product-related services and to determine what else could be done to serve the customers better. Listening and sensitivity to market reactions play vital roles in establishing a sustainable market relationship. After the customer services stage, the business cycle starts anew from the research and development stage, then, design, etc., and the cycle continues.  15 Accounting Environment.Business and Accounting.Market and Business Cycle M1.L1.T1 2.4 Fiduciary and proprietary functions Fig.6.0 Fiduciary and proprietary functions A business advisably should start with a plan of interrelated ideas nurtured into a cohesive set of actions towards a defined end. Fiduciary Proprietary Normally, business activities start with the money and resources entrusted by the creditors and owners. These entrusted monies and resources are Steward ship used to produce goods and services that are distributed in the market at a higher value. Fiduciary function Conserve! The process of conserving the interests of the creditors and owners by means of prudent safekeeping is called fiduciary function. This business virtue is related to savings! Investments, withdrawals, drawings, and salary advances are examples of fiduciary transactions with the owners. Granting of loans, payments of principal, payments of interests are examples of fiduciary transactions with the creditors. The fiduciary function relates to the financing activities of the enterprise. It relates to those involving creditors and owners. Proprietary function Grow! The process of using business resources to produce and distribute goods and services for profit is called proprietary function. It is synonymous to the process of wealth creation! Inherent in the process of doing business is the efficient use of resources. This means using resources at the least amount and utilization rate. Moreover, a business needs to grow, it needs to expand. To do this it has to increase wealth. One major way of creating wealth is by generating profit. Acquiring machines, equipment, and similar resources and paying expenses such as salaries and wages to personnel, rental to lessors, telecommunications, electricity, and water consumption to utility companies, advertising to promoters, and related activities are examples of proprietary activities. The proprietary function relates to the investing and operating activities of the enterprise. Investing activities relate to the management of long-term assets or resources. Operating activities deal the production, distribution, and administration aspects of the business.  16 Accounting Environment.Business and Accounting.Market and Business Cycle M1.L1.T1 Business Recording, Reporting and ML 3 Decision-Making 3.0 The need for accounting Accounting is the process of recording and reporting business transactions and events as a basis in making economic decisions. Accounting reports are used by those whose decisions are influenced by market forces such managers, investors, creditors, and suppliers, and by those that regulate the market such as government regulatory agencies and privately-organized accrediting organizations. 3.1 Business recording Records are Business recording focuses with business transactions and there effects, the quality of records, bases of and the reliability of the recording process. reports. Business transactions The volume and financial details of business transactions need to be recorded for reference, sorting, and verification purposes. It is not surprising for medium-sized enterprises to process more than a hundred business transactions daily. If these economic activities are not recorded there is great risk they will not be included in the financial report. There is also an equal risk the effects of the business transactions would be erroneously recorded. Quality of records Business records should be completely and accurately maintained and shall be available for verification of independent parties. Records should be supported by business documents that are thoroughly verified, amply secured, dutifully kept, thoughtfully organized, and made available for reference and inspection. Reliability of recording The recording of the effects of business transactions and events should follow an organized process, forms, and policies to ensure accuracy and authority in the recording activities leading to the first and crucial step of ensuring a relevant business reporting. 3.2 Business reporting Business reporting deals with the usefulness and the presentation quality of the financial reports.  17 Accounting Environment.Business and Accounting.Market and Business Cycle M1.L1.T1 Relevance Reports are Financial reports serve as a basis in making reasoned economic decisions. Relevant reports bases of influence decisions by being understandable, useful, timely, and objectively presented. decisions. Understandability speaks of the format, terms, arrangement, and measurement used to prepare the financial report in conformity with established financial reporting standards and in the manner reflecting the business model used, the legal environment, and the psychology of the business community at a given place and period of time. A business report that is used in making an economic decision is relevant. Business decisions are predominantly made to manage future activities and conditions. Timely reports critically augment its usefulness. Reporting comes from within. It is an outward-inward process. Instinctively, the quality of the report is defined by the objectivity of the reporter and the process of reporting. Objectivity is a state of mind that can only be assessed once the report has been furnished. After which, the integrity of the reporter shall be forged by public opinion as to the relevance of his report. Presentation, recognition and measurement of assets and liabilities Interested parties have varying orientation and should be assured that each of the presented information on the financial reports is accurate and reflective of the transactions and events that transpired in the business. And that all of the resources and obligations of the enterprise are recognized and measured in conformity with established financial recoding and reporting procedures and standards. 3.3 Compliance to government regulations Government Government regulatory agencies issue mandatory pronouncements that need to be complied levels the with, reported, and assessed for purposes of permit issuances, tax compliance, and other playing field. regulatory standards for public safety and interests. Compliance to regulatory reporting and standards likewise speaks of the quality and values of the business enterprise as a juridical citizen in the society. 3.4 Business controls Control on disbursements Control The importance of business records could not be undermined as to the accuracy of recognizing means liabilities and corresponding payments to critically balance the cash position of an enterprise. business.  18 Accounting Environment.Business and Accounting.Market and Business Cycle M1.L1.T1 Safeguarding of assets Safekeeping of assets could not be accomplished without the support of a reliable business recording and reporting system. Records and reports prevent the occurrence of theft, misuse, misappropriation, abnormal spoilage, and operating inefficiencies that reduce the value of owner’s equity. 3.5 Management information Accounting reports are bases for strategic, tactical, and operating management decisions. Information Accounting reports serve as a basis for planning, controlling, predicting, and evaluating induces activities in the business operating cycle. Establishing selling price, preparing budgets, intelligence evaluating personnel performance, dealing with competition, and encouraging for the to action. productivity improvement are some of the notable uses of accounting information for better operating results. More so, accounting information is used in making strategic decisions crucial for the long-term survival and growth of an enterprise. 3.6 Dealing with business partners and employees Reconciliation of records Cuentas Business enterprise deals with suppliers and customers as its business partners. Differences in claras records between the enterprise and its business partners as to timing, quantity, prices, conservan la presumptions, and plain miscalculations may cause misunderstanding among transacting amistad! parties. This unnecessary adverse business relation may be averted by making related business records available and open for reconciliation. An unreliable business recording system would not surely help in realizing the objective of business reconciliation and would naturally weaken the position of an enterprise in its ardent quest to earn and maintain the trust of its business partners. Personnel empowerment Modern business thoughts consider personnel as a potent, if not the most important, resource in a business enterprise. Hiring the best qualified personnel, continuously upgrading their technical skills and work ethics and strategically sharing with them the yield of business activities would help maintain the cycle for business growth and progress. Accounting information gives an invaluable input in developing the right model for personnel empowerment.  19 Accounting Environment.Business and Accounting.Market and Business Cycle M1.L1.T1 3.7 Financing transactions Borrowings and payments Financing is When businesses reach the momentum for accelerated growth, more capital shall be needed growth. and financing reassumes its crucial role. Loans are normally tapped to sustain business expansion and growth activities. Accounting information would give the lender an idea on the potential cash generating capacity of the investment opportunities needed to be financed and its ability to meet principal and interest payments. Owners’ investments and withdrawals Owners need to be updated on the value of its equity with specific information as to its investments, accumulated profits, withdrawals, drawings, and other equity changes. This information gives the owner an ability to assess to need for future capital infusion and the limitations for possible drawings and capital withdrawals.  20 Accounting Environment.Business and Accounting.Market and Business Cycle M1.L1.T1 Accounting and the Other Fields of Arts and ML 4 Sciences 4.0 Accounting as an interdisciplinary field of discipline Accounting as a field of professional study interoperates from the field of its origin to its complementary existence with the other fields of discipline. 4.1 Accounting and economics Accounting is Economics as a social science is instinctive and instantaneous to men and organized businesses inter and as well. Accounting provides information for economic decisions. multi- disciplinary. Economics relates to how men behave, live, and survive in the society in pursuit of happiness. Men need to make decisions to survive, progress, or perish. Mostly, economic decisions are made to make wealth. It is in this process of making reasoned economic decisions that men need relevant and reliable economic information. Fig. 7.0 List of Academic Disciplines and Sub-disciplines 4.2 Accounting and finance Accounting provides economic reports, and measures business activities, in terms of money. It is the chosen medium of expression to make accounting reports presented in a more objective, specific and measurable manner. Accounting and finance are inextricably inseparable. Accounting reports are critical in developing financial strategies to raise money, select investment, and continuously accumulate profit. 21 Accounting Environment.Business and Accounting.Market and Business Cycle M1.L1.T1 4.3 Accounting and mathematics Accounting uses money as the principal medium of expression for objectivity in measurement. In addition, it applies mathematics to accurately calculate values, monetary and non-monetary alike, in the process of recording, reporting, and interpreting the effects of business transactions. Accounting and law Accounting deals with business transactions which is central to commercial law dealing with obligations and contracts. Recording business transactions would require considering the legal environment and implications of the business transactions, events, and conditions to business records and reports. The forms and records used in business are developed within the bounds of legal requirements and reports are prepared to also reflect the legal environment of a business enterprise. 4.4 Accounting and history History without economics is a portrayal of emotions. History with economics is intelligent living. The wealth of an individual or organization, measured in terms of physical existence or symbolic representation, in a given era with the prevailing interplay of laws, traditions, cultures, beliefs, and technology shall only be objectively evaluated with fascination if made in terms of measuring economic uptrend or downtrend in the entity-specific level. 4.5 Accounting and psychology Accounting as a mode of communication sets a paradigm of understanding the forces affecting business to make a harmonious balance to an optimal result. A presented numerical value, in a behavioral perspective, may set the tone for a call to heightened or reduced actions depending on how business managers and leaders would like to use the information. 4.6 Accounting and physiology Inasmuch as accounting is affected by multifarious variables besetting the business environment, it presents a mix of information that is specifically important to comprise a harmonized totality. The challenge of understanding the impact of specific information as it relates and influences the other variables in a whole makes accounting information a unique report to mirror the complexities of business environment. 4.7 Accounting and ecology 22 Accounting Environment.Business and Accounting.Market and Business Cycle M1.L1.T1 The expression on how valuable an ecological component as considered in isolation and in the perspective of natural balance could be better appreciated by assigning values that are acceptable, understandable, and relevant to warrant its conservation and protection. 4.8 Accounting and medicine Health is wealth. The business of health should be properly understood to serve men in making a healthier and happier life. 4.9 Accounting and public governance Governance without public accountability is authority without answerabiity. Public funds should be accurately and completely accounted for to foster general welfare and interests resulting to a more livable community. TOPIC SUMMARY A society must choose a well-founded economic model to thrive and grow. In a capitalistic economy, societal growth and progress are achieved by encouraging the freedom of enterprise. This philosophy considers a person as an economic unit that is entitled to have a share in the wealth of the society. Economic wealth is created through an exchange process that transfers values from a person to another. The exchanges of values in an economy are known as business transactions. The effects of these transactions should be recorded, processed, and reported to measure the financial status and performance of individuals and their society as a whole.