Discussion of Economics of Accounting from Contracting Perspective

Topics: Asset, Balance sheet, Liability Pages: 2 (522 words) Published: July 14, 2010
A firm can be seen as a set of contracts, in which accounting information plays an important role of improving their efficiency. This memo discusses the contracting issues based on the team presentations in class, using Eli Lilly & Co. example. The two parts include the overview of Eli Lilly and the analysis of its sales contract. OVERVIEW OF ELI LILLY

Goals & Objectives
Eli Lilly devotes its effort to invent and sell new drugs, with a mission of helping people live longer, healthier, more active lives. Eli Lilly’s business goal is keeping constant innovation of drugs. And its objective could be making profits by selling innovative drugs. Business Processes

Under its business goal and objective, Eli Lilly’s business processes could be described as financing, investing in research and development, and selling. This circle of business processes ensures the normal function of the company. Sources and use of Capital

In general, a company’s sources of capital are debt and equity. By looking at the recent financial statistics of Eli Lilly, Team 1 figured out that the main source of Eli Lilly’s capital is debt rather than equity. Additionally, the rate of total liabilities to total assets of Eli Lilly is much higher than that of the industry average. Thus we can tell that Eli Lilly obtains its capital mainly from its debtors. On Eli Lilly’s recent balance sheet, it is not difficult to find that cash and cash equivalents together with short-term investment make a large portion of total assets. This could help guarantee the pay of debt and increase the liquidity of its assets. ANALYSIS OF THE SALES CONTRACT

Objective of parties
In the sales contract, the two parties are Eli Lilly and its major customer. The objective of Eli Lilly is selling the drugs and makeing a profit, while the customer’s objective could be getting the products under desirable terms. For both of the parties, they will expect to maintain their cooperation to the future if the objectives mentioned...
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