Economic Decision Making Using Cost Data

Chapter 2

What Matters and What Doesn’t: Relevant Revenues and Costs

The primary goal of a firm is to maximize profits. This implies, of course, that each decision a manager makes is consistent with that goal. Although managers are expected to rely on internally produced reports to help them make decisions, most of the information that appears on these statements is period based rather than decision based. A balance sheet shows the sum total of a firm’s assets and liabilities at a given point in time. If the firm sold off all of its assets at book value and used the proceeds to pay its liabilities, what remains is owner’s equity, which is the amount that is owed to shareholders. An income statement is the difference between revenues and expenses ...