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The accountant uses a document called the balance sheet to depict the financial condition of the firm at any point of time. That comprises assets on one side, and liabilities and owner's equity on the other. Assets are resources that help the firm generate future cash inflows or reduce outflows…
The entries are counterbalanced so that the assets always equal the liabilities and owner's equity. The balance sheets of the company are examined by shareholders.
The fundamental principles of economics are optimization and market equilibrium. The optimization principle says that people choose the best consumption patterns that they can afford. The market equilibrium principle states that prices adjust till demand equals supply. A supply curve measures how much of a good will be supplied at a given price. Suppose we reach a price p for the supply of a quantity x. The producer would be willing to supply a smaller amount at a lower price. However the entire quantity is sold at the price p. The producer's surplus measures the gains to the firm by selling all the goods at the higher price p. The concept of surplus enables us to determine the gains and losses for the firm. The consumer's surplus is the difference between the gross benefit of consuming the good and the price paid for that good. This perspective lets us understand the firm from economics theory. The concept of producer's surplus is closely linked to the concept of profit.
9. The accounting approach does not measure the large gaps between the true value of the firm and the observed market value. ...
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