Effects of Economic Factors in Firms

2021-05-11 09:35:24
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Companies should pay attention to economic factors because they determine its operations. The factors influence major decisions in a corporation such as the production level, pricing, and the direction of future growth strategies. Economic factors such as demand and supply help in determining the size of the market for a product or service. If the best decisions towards demand and supply are made, then the enterprise chances of success increase. Inflation and interest rate need consideration when a company decides on the capital mix to use. The success of a company in the long-run depends on proper decisions about the economic factors.

Effects of economic factors in firms

Apple, American High-Tech company earnings for the last five years, has been influenced by demand and supply. Products such as iPhone have been having higher demand than supply, hence enabling the company to produce the highest number possible (Warman, 2013). The increased demand has dominated in the Apple's products for some years now leading to high profits and a competitive advantage. The increasing demand has enabled the company in pricing by setting the prices relatively high. The demand has also resulted in increased sales. Apple has been producing the highest number of iPhone possible but, ensuring that the quality is maintained. The suppliers have been allowed to request for more stock as many times as possible.

Financial statements

An income statement items will follow the order below as shown in the sample format:

Sales ***

Cost of goods sold (**)

Goss profit ***

Selling, general and administrative expenses(**)


Depreciation (**)

Interest (**)


Tax expense (**)

Net income **

The income statement order from the list of items starts with sales then minus the cost of sales to get the gross profit. Then, Selling, general and administrative expenses minus gross profits to get EBITDA, where depreciation then interest and finally tax are subtracted to get the net income.

The balance sheet items that make up short-term assets include cash, accounts receivable, and inventory. The expectation is that they will be held for less than one year. The long-term assets were plant and equipment and property. The short-term liabilities include accounts payable and accruals. The long-term liabilities include mortgage and notes payable. Notes payable can be classified as either current or long-term liabilities depending on the credit period. If less than a year they are current liabilities and if more, they are long-term liabilities. Owners equity is made up of paid-in capital and retained earnings. The balance sheet items arrangement should start with the non-current assets, then the current assets, followed by non-current liabilities, then current liabilities and finally owners equity.

The four primary financial statements prepared are balance sheet, income statement, cash flow statement and statement of changes in equity (Needles, Powers & Crosson, 2013, p. 12). The balance sheet shows the financial position of a company. It is prepared using the assets, liabilities and owners equity of an entity. The income statement is prepared to show the performance of an entity in a particular time. Revenues and expenses are used to show the profits generated. Cash flow displays the cash inflows and outflows over time. It is important because it demonstrates the ability of an organization to meet current obligation and emergencies. The statement of changes in equity provides users with the impacts of business operation on equity. The statement assists investor to know how much wealth they are creating.

Cash flows activities are classified into three major types. They include operating, investing and financing. The operating activities are made up of cash generated from the primary business operations. The category records cash payments and receipts. Investing activities are composed of all cash inflows or outflows associated with long-term assets. For example, cash received from the sale of long-term assets such as land and property are recorded here in the cash flow statement. The financing activities cash are the ones associated with equity capital and the non-current liabilities. For example, cash received for long term loan principal and issues of new shares.

The following items will be used in the cash flows statement. Inventory increase for the period, accounts receivable increase for the period, accounts payable decrease for the period, accruals decrease for the period, and notes payable increase for the period; the items makes part of operating activities cash flows. Property purchased is cash outflows in the investing activities. Bonds redeemed and bonds paid off forms part of the financing activities. The above items are recorded in the cash flow statement because they lead to cash inflow or outflow. The following items should not be considered for recording in cash flow since they do not bring cash flows. They are stock issued, cash decrease and net income increase for the period.


Warman, M. (2013). Apple: We Can't Keep Up With demand. The Telegraph.Needles, B., Powers, M., & Crosson, S. (2013). Financial and Managerial Accounting (10th ed.). Cengage Learning,.

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