Financial Accounting: In an Economic Context

VALUATIONS ON THE BALANCE SHEET

The dollar values attached to the accounts on a company's balance sheet are largely determined by the markets in which the company operates. To understand these markets, it is helpful to view a business entity in the following way.

A business entity operates in two general markets: an input market, where it purchases inputs (e.g., materials, labor) for its operations, and an output market, where it sells its outputs (services or inventories). Input market values (prices) are normally less than output market values (prices). For example, local automobile dealers purchase automobiles from manufacturers, such as Toyota, Daimler, and Ford Motor Company, and sell them to consumers. The prices paid for automobiles by dealers in their input market are generally less than the prices paid by consumers in the output market. A new Honda, for example, may cost a dealer $19,000 in the input market and may be sold to you, a customer, for $23,000 in the output market.

Moreover, input and output markets are defined in terms of specific entities: one entity's output market may be another entity's input market. DuPont, for example, supplies complete front and back assemblies for the General Motors cars produced at a GM plant near Kansas City, Missouri. When GM purchases these assemblies, the transaction takes place in the output market of DuPont and the input market ...