THE FINANCIAL CONFORMITY PRINCIPLE

Since the middle ages when monks and bankers started to develop a new discipline called FINANCIAL ACCOUNTANCY , it was very clear how the FUNDS of a company or corporation should be allocated and to stand not only on THE BALANCE SHEET but inside the whole business itself. A Balance Sheet is splitted into 3 general accounts: ASSETS (A), LIABILITIES (L) and EQUITY (E). Where: A = L + E

Likewise, every account could be splitted into several accounts but investors and the IASB (International Accounting Standard Board) have solved that such SUBDIVISIONS are acceptable if: A = CURRENT ASSETS(CA) + LONG TERM ASSETS(LTA). Thus, L = CURRENT LIABILITIES(CL) + LONG TERM DEBT(LTD).

This means that a liquidity risk and a default might arise if a manager solves to apply improperly and against the orthodox OF THE FINANCIAL STRUCTURE = (L+E) third-party short term funds over long term investments, for instance. Or an out of the money yield achieved due to stock repurchasement with all of the cash from the CURRENT ASSETS despite of the fact that the market price of the stock is HEAVILY OVERVALUED!

A business without LIABILITIES AND FULLY financed with its own resources (E) have to structure its EQUITY in a way that capital adequacy fulfills the legal or technical requirements to operate without borrow money at a usury level rate. Mathematically speaking: A = (CA + LTA) =[ L = (CL + LTD)] + E.

Rearranging: [CA I CL] and [LTA I (LTD+E)] without LONG TERM DEBT, the relationship is: [CA I CL] and [LTA I E], or without CURRENT LIABILITIES: [CA] and [LTA I ( LTD +E)]

WITH NO LIABILITIES AT ALL: [(CA+LTA) I E]

I realized this article and the relationship functions, linking them, largely based on several CORPORATE SCANDALS AND BANKRUPTCIES shown to the stockholders and creditors as SUDDEN DEFAULTS. Such badly nicknamed "sudden defaults" are due in part to mixing and mismatching RESOURCES AND FUND APPLICATIONS assuming HONESTY and good will from the BOARD OF DIRECTORS AND THE EXECUTIVES

For the financial health of any given ENTERPRISE you should remind. Current Assets: assets expected to be turned into cash within a year or less, Long-Term Assets: assets needed to manufacture stocks or to offer a service generating cash on a regular basis and turned into cash by themselves within a year or more, Current Liabilities: debts and obligations to be honored within a year or less, Long Term Liabilities: debts and obligations to be honored within a year or more, Equity: the own funds provided by the partners; the equity lacks of a particular time frame or a fixed maturity date.

NO MIXING, NO MISMATCHING!