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ACCT 2101
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TEST 1Chapter 1 IntroductionThis course is about managing in particular accountingWhats the objective of managingObjective Maximize the value of the firmValueCalled the NPV of the expectation of future cash flowsNnetcash inflowsthe cash outflowsPpresenttodayVvalueEexpectedforecast We dont know what will happen in the future but we can make predictions about itThe decisions aredealing with the futureforward lookingWhen we make decisions we cant affect the things happened in the past but we can change things that will happen in the future We only care about what happened yesterday if it helps us to look towards tomorrowTime HorizonShareholders horizon is infinityWhen we talk about values were talking about cash flows all the way up to infinityBrings problems because firms or managers dont last for infinityHow do we get this present valueConsider an investment today I and interest rate r0Whats the value of this investment one period from now F1F1IrI00I1roIF101r present value of FThis process is called discounting1Another way to say this is to say a dollar today is worth more than a dollar tomorrowoBecause the F1 dollar tomorrow is being divided by something thats greater than 1 so we know that the answer is greater than F1ValueNPVEfuture cash flowsFirms make charitable contributions people think that managers are giving away profits but they arentSome donations are marketing techniquesSome is designed to attract and retain good employeesWhat is a FIRMIt is a legal fiction oNot something that you can physically touch just a piece of paperIts a collection of contracts a nexus of contractsTypes of contracts1Explicit written contracts need these three thingsaThere has to be an offer bThere has to be acceptance to that offercThere has to be consideration something of value to change handsiTheyre expensive to writeiiTheyre easy to enforce iiiTheyre reserved for big dollar items ivSenior executives use them as employment contracts along with the topdozen people in the firmvSo do sportsentertainment personnelviUnion contracts for union employees2Explicit oral contracts aThey need the same necessities as above but not in writingiSo its cheaper to set upiiBut theyre harder to enforce because if you end up with a dispute of contract and the judge doesnt have written documentation where do you go3Implicit contractsaMost contracts are implicitbThey arise frequently when people continue doing business together without formally agreeing on business termscExample 1 Fast FoodiOffer When you place an orderiiAcceptance When the employee keys in the orderiiiConsideration Food and cashdExample 2 Most employment contractsiDepending on what kind of job you may get an offer but that in itself is not the contractiiSome states including LA is what is called a righttowork state which means your employer can dismiss you fire at any noticeeThere may be other implicit terms iFood wont poison you iiToaster wont electrocute youiiiWarrantyfAccounting features prominently in many contractsiMaximizing value requires writing contracts and contracts use accountingLegal SystemA way to enforce contractsWe need an effective legal systemoThere are a lot of countries that have legal systems that are very ineffectiveFriendsFamily Approach You only contract with people you trust oTrouble with this is that it does get unweilding oYoure going to have to eventually contract with people outside your friends and familyWithout legal systems theres chaosoBribery corruption organized crimeFIGURE 11Industry Contracts1Film industryaWriters actors producers directors studio distribution all involvedbSome of these are Participation ContractsSome participants get a share of the box office receipts revenue andor the profit2Oilgas industryaExploration of production Royalties to be paid to the governmentbPipelinesshippingcRefineriesdDistribution3Franchise contractsaSome industries live and die by these thingsb Fast foodrestaurant chainscMuffler and brake shops MIDASdTransmission shops AAMCO
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