The Economic Environment and Financial Reporting

ADS The Economic Environment and Financial Reporting
In the United States, we have a highly developed free-enterprise economy with the majority of productive resources privately owned rather than government owned. For the economy to operate efficiently, these resources should be allocated to private enterprises that will use them best to provide the goods and services desired by society and not to enterprises that will waste them. The mechanisms that foster this efficient allocation of resources are the capital markets . We can think of the capital markets simply as a composite of all investors and creditors.

Businesses go to the capital markets to get the cash necessary for them to function. The three primary forms of business organization are the sole proprietorship, the partnership, and the corporation. In the United States, sole proprietorships and partnerships outnumber corporations. However, the dominant form of business organization, in terms of the ownership of productive resources, is the corporation . Investors provide resources, usually cash,  to a corporation in exchange for an ownership interest, that is, shares of stock. Creditors lend cash to the corporation, either by making individual loans or by purchasing publicly traded debt such as bonds

Stocks and bonds usually are traded on organized security markets such as the New York Stock Exchange and the NASDAQ. New cash is provided by initial market transactions in which the corporation sells shares of stock or bonds to individuals or other entities that want to invest in it. Subsequent transfers of these stocks and bonds between investors and creditors are referred to as secondary market transactions . Corporations receive no new cash from secondary market transactions. Nevertheless, secondary market transactions are extremely important to the efficient allocation of resources in our economy. These transactions help establish market prices for additional shares and for bonds that corporations may wish to issue in the future to acquire additional capital. Also, many shareholders and bondholders might be unwilling to initially provide resources to corporations if there were no available mechanism for the future sale of their stocks and bonds to others. What information do investors and creditors need when determining which companies
will receive capital. ADS