Discussion of Economics of Accounting from Contracting Perspective

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 are realized. Rights and responsibilities We noticed that the rights to Eli Lilly are some of the responsibilities of the customer, and the responsibilities of Eli Lilly are some of the rights to the customer.

Rights and responsibilities issues include quality of the drugs, fees and payment, delivery, confidentiality, and government regulations. Performance expectation and measurement Eli Lilly is expected to supply qualified products meeting industry standards. And the customer is expected to pay for the goods timely. When measuring these performance expectations, we could Use of information in contract Accounting information helps a lot in the efficiency of the contract.

Firstly, accounting measures input of each party; Secondly, accounting determines the entitlement of the each parties; thirdly, accounting distributes information about In conclusion, we encourage Satsuki to adopt above recommendations. By implementing our recommendations, the Champaign restaurant is likely to be profitable in one year’s time. However, if the loss persists for another year, we will suggest you to close down the restaurant barely because Champaign is not the right market for Satsuki to enter. If you have any queries, please contact me at