Business Organization and Management

Define business.

the organized effort of individuals to produce and sell, for a profit, the goods and services that satisfy society’s needs

List and describe the four kinds of resources in a business organization.

Human resources
people who furnish their labor to the business in return for wages
Financial resources
money required to pay employees, purchase materials, and generally keep the business operating
Material resources
capital resources needed to produce goods and services
Informational resources
tells the managers of the business how effectively the other three resources are being combined and used

How does a business know if it is making a profit? What is the formula to determine business profit or loss?

If the firm’s sales revenues are greater than its expenses, it has earned a profit.
Sales Revenue - Expenses = Profit/Loss

What is meant by the term "stakeholders" for a business? Identify who are some stakeholders.

all the different people or groups of people who are affected by an organization’s policies, decisions, and activities

What is economics? Describe the major types of economic systems.

the study of how wealth is created and distributed
MAJOR TYPES:
Market economy
Mixed economy
Command economy

What are the economic factors of production? How do they compare to the four resources used to organize a business?

Land and natural resources
Labor
Capital
Entrepreneurs
They are the same/similar to the resources used to organize a business

What is the purpose of economic indicators?

They help to gauge the economic health of the nation.

What is the GDP? CPI? PPI? Inflation? Deflation? Unemployment? Productivity? Federal deficit? National debt?

GDP:
the total dollar value of all goods and services produced by all people within the boundaries of a country during a specified time period
CPI
a monthly index that measures the changes in prices of a fixed basket of goods purchased by a typical consumer in an urban area
PPI
a monthly index that measures prices that producers receive for their finished goods
Inflation
a general rise in the level of prices
Deflation:
a general decrease in the level of prices
Unemployment
the percentage of a nation’s labor force unemployed at any time
Productivity
the average level of output per worker per hour
Federal deficit
a shortfall created when the federal government spends more in a fiscal year than it receives
National debt
the total of all federal deficits

List and describe the stages in the business cycle.

peak
Economy is at its highest point and unemployment is low
Total income is relatively high
Consumers are willing to buy products and services
recession
Two or more consecutive three-month periods of decline in a country’s GDP
Unemployment rate to increase and consumer buying power to decline
trough
When a nation’s production and employment bottom out and reach their lowest levels
Federal Reserve’s actions to promote maximum employment, stabilize prices, and increase or decrease interest rates
recovery
The movement of the economy from the trough, when a nation’s production and employment bottom out and reach their lowest levels, to the next peak in a business cycle

List and describe the forms of competition. Provide examples for each.

Perfect (or pure) competition
the market situation in which there are many buyers and sellers of a product, and no single buyer or seller is powerful enough to affect the price of that product
EX. Many agricultural products
Monopolistic Competition
a market situation in which there are many buyers along with a relatively large number of sellers who differentiate their products from the products of competitors
EX. Consumer items
Oligopoly
a market (or industry) in which there are few sellers
strong effect on price
EX. automobile industry, airline, car rental, cereal
Monopoly
a market (or industry) with only one seller, and customers can only buy the product or service from that seller
local gas, electricians, water, etc.

Chapter 2

What is meant by business ethics? What is a code of ethics?

the application of moral standards to business situations
a guide to acceptable and ethical behavior as defined by the organization

What are some areas of business in which ethical issues often arise?

Fairness and honesty
Obeying all laws and regulations, knowingly deceiving, misrepresenting, or intimidating others
Organizational Relationships
Business people may place their personal welfare above the welfare of others or the welfare of the organization
Conflicts of Interest
when businesspeople take advantage of a situation for their own personal interest rather than for the employer’s interest
Communications
Advertising

What are the three sets of factors that affect ethical behavior in organizations? List and describe each.

Individual Factors Affecting Ethics
A decision maker with a greater amount of knowledge regarding a situation may take steps to avoid ethical problems
Social Factors Affecting Ethics
A person’s behavior in the workplace, to some degree, is determined by cultural norms, and these social factors vary from one culture to another
Opportunity as a Factor Affecting Ethics
Opportunity refers to the amount of freedom an organization affords an employee to behave unethically if he or she makes that choice
If the employee is rewarded in some way for an unethical choice or fails to suffer any kind of consequence, he or she is more likely to make that same choice in the future

What is whistle blowing?

informing the press or government officials about unethical practices within one’s organization

What is social responsibility? Describe the two major views of social responsibility. What are some arguments for and against increased social responsibility?

the recognition that business activities have an impact on society and the consideration of that impact in business decision making
Pro:
Because business is a part of our society, it cannot ignore social issues.
Business has the technical, financial, and managerial resources needed to tackle today’s complex social issues.
By helping resolve social issues, business can create a more stable environment for long-term profitability.
Socially responsible decision making by firms can prevent increased government intervention, which would force businesses to do what they fail to do voluntarily.
Con
Business managers are responsible primarily to stockholders, so management must be concerned with providing a return on owners’ investments.
Corporate time, money, and talent should be used to maximize profits, not to solve society’s problems.
Social problems affect society in general, so individual businesses should not be expected to solve these problems.
Social issues are the responsibility of government officials who are elected for that purpose and who are accountable to the voters for their decisions.

What is consumerism? Describe the six basic rights of consumers.

all activities undertaken to protect the rights of consumers
6 RIGHTS
Right to safety
products purchased must be safe for their intended use, must include thorough and explicit directions for proper use, and must be tested by the manufacturer to ensure product quality and reliability
Right to be informed
consumers must have access to complete information about a product before they buy it
Right to choose
consumers must have a choice of products, offered by different manufacturers and sellers, to satisfy a particular need
Right to be heard
someone will listen and take appropriate action when customers complain
Right to consumer education
people will be fully informed about their rights as consumers
Right to service
entitles consumers to convenience, courtesy, and responsiveness from manufacturers and sellers of consumer products

List some government actions that have been taken to affirm the rights of employees to equal treatment in the workplace and the government agency with the power to investigate complaints.

Affirmative Action Programs
Equal Employment Opportunity Commission (EEOC)
Workplace Bullying Institute (WBI)

Chapter 3

Define international business.

all business activities that involve exchanges across national boundaries

Define absolute advantage and comparative advantage. Provide examples of each.

absolute advantage
the ability to produce a specific product more efficiently than any other nation
Saudi Arabia in the production of crude oil and petroleum products
comparative advantage
the ability to produce a specific product more efficiently than any other product
You can accurately type 90 words per minute your assistant can type 80 words per minute but would run the business poorly

What are some restrictions to international business (i.e., barriers to trade)? Describe the various types of tariffs.

Tariffs
revenue tariff
generate income
protective tariff
protect domestic industry from competition
Dumping
Non Tariff Barriers
import quota
embargo
import quota
embargo
exchange control
currency devaluation

What are some reasons for and against trade restrictions?

For
To equalize a nation’s balance of payments.
To protect new or weak industries.
To protect national security.
To protect the health of citizens.
To retaliate for another nation’s trade restrictions.
To protect domestic jobs.
Against
Higher prices for consumers.
Restriction of consumers’ choices.
Misallocation of international resources.
Loss of jobs.

What is the WTO? From what international trade agreement did it originate, and for what purpose was it organized?

World Trade Organization
Originated from General Agreement on Tariffs and Trade (GATT)
an international organization of nations dedicated to reducing or eliminating tariffs and other barriers to world trade

What are some methods for a firm to enter into international business?

licensing
exporting
joint ventures
totally owned facilities
strategic alliances
trading companies
countertrade
becoming a multinational firm

How has international trade changed since the end of World War II?

increased volume, reduced barriers, and greater complexity

Chapter 4

What is a sole proprietorship? What are the advantages and disadvantages of a sole proprietorship?

a business that is owned (and usually operated) by one person
Adv.
Ease of Start-Up and Closure
Pride of Ownership
Retention of All Profits
No Special Taxes
Flexibility of Being Your Own Boss
DisAdv.
Unlimited Liability
Lack of Continuity
Lack of Money
Limited Management Skills
Difficulty in Hiring Employees

What is a partnership? What are the different types of partners and partnerships that might exist?

a voluntary association of two or more persons to act as co-owners of a business for profit
Types
General Partners
a person who assumes full or shared responsibility for operating a business
Limited Partners
a person who invests money in a business but has no management responsibility or liability for losses beyond the amount they invested in the partnership

What is a partnership agreement, and why is it important to have in writing?

refers to an agreement listing and explaining the terms of the partnership
a written agreement has an obvious advantage

What are the advantages and disadvantages of a partnership?

Adv
Ease of Start-Up
Availability of Capital and Credit
Personal Interest
Combined Business Skills and Knowledge
Retention of Profits
No Special Taxes
DisAdv
Unlimited Liability
Management Disagreements
Lack of Continuity
Frozen Investment

What is a corporation? What are the advantages and disadvantages of a corporation?

an artificial person, created by law, with most of the legal rights of a real person
Adv
Limited Liability
Ease of Raising Capital
Ease of Transfer of Ownership
Perpetual Life
Specialized Management
DisAdv
Difficulty and Expense of Formation
Government Regulation and Increased Paperwork
Conflict Within the Corporation
Double Taxation
Lack of Secrecy

What is meant by a domestic corporation? A foreign corporation? An alien corporation?

Domestic corporation
a corporation in the state in which it is incorporated
Foreign corporation
a corporation in any state in which it does business except the one in which it is incorporated
Alien corporation
a corporation chartered by a foreign government and conducting business in the United States

What is an S-corporation? A limited-liability company (LLC)? A not-for-profit corporation? Give some examples.

S-corporation
a corporation that is taxed as though it were a partnership
Criteria:
No more than 100 stockholders are allowed.
Stockholders must be individuals, estates, or certain trusts.
The corporation has no nonresident, alien shareholders.
There can be only one class of outstanding stock.
The firm must be a domestic corporation eligible to file for S corporation status.
All stockholders must agree to the decision to form an S corporation.
Limited Liability Companies
a form of business ownership that combines the benefits of a corporation and a partnership while avoiding some of the restrictions and disadvantages of those forms of ownership
Not-for-profit corporation
(sometimes referred to as nonprofit) a corporation organized to provide a social, educational, religious, or other service rather than to earn a profit

What is a cooperative? A joint venture? A syndicate? What are the benefits of these forms of organization compared to traditional forms of ownership?

Cooperative
Joint ventures
an agreement between two or more groups to form a business entity in order to achieve a specific goal or to operate for a specific period of time
benefits:
The joint venture and the liabilities of the people or businesses involved usually are limited to one project.
Once the goal is reached, the period of time elapses, or the project is completed, the joint venture is dissolved.
Syndicate
a temporary association of individuals or firms organized to perform a specific task that requires a large amount of money
benefits
no one person or firm is willing to put up the entire amount required for the undertaking.
usually dissolved as soon as its purpose has been accomplished.

Define and provide examples of the different types of mergers (e.g. horizontal, vertical, and conglomerate).

horizontal
a merger between firms that make and sell similar products or services in similar markets
vertical
between firms that operate at different but related levels in the production and marketing of a product
conglomerate
between firms in completely different industries

Chapter 6

Define management.

the process of coordinating people and other resources to achieve the goals of an organization

Describe the four functions of management, including tasks managers might perform as part of each function.

Planning
establishing organizational goals and deciding how to accomplish them
Strategic Planning Process
Establishing Goals and Objectives
SWOT Analysis
Types of Plans
Organizing the Enterprise
the grouping of resources and activities to accomplish some end result in an efficient and effective manner
Leading and Motivating
leading
the process of influencing people to work toward a common goal
motivating
the process of providing reasons for people to work in the best interests of an organization
Controlling Ongoing Activities
controlling
the process of evaluating and regulating ongoing activities to ensure that goals are achieved

Describe the types of plans that managers develop and use.

strategic plan
an organization’s broadest plan, developed as a guide for major policy setting and decision making
tactical plan
a smaller-scale plan developed to implement a strategy
operational plan
a type of plan designed to implement tactical plans
contingency plan
a plan that outlines alternative courses of action that may be taken if an organization’s other plans are disrupted or become ineffective

What are the three levels of management and the key skills needed by managers at each level?

top management
an upper-level executive who guides and controls the overall fortunes of an organization
Skills:
developing the organization’s mission
determine the firm’s strategy
middle management
a manager who implements the strategy and major policies developed by top management
Skills:
develop tactical and operational plans, and they coordinate and supervise the activities of first-line managers
first-line management
a manager who coordinates and supervises the activities of operating employees
Skills:
working with and motivating their employees
answering questions
solving day-to-day problems

Explain the different types of leadership and leadership styles.

types of leadership
formal:
have legitimate power of position
informal
have no such authority and may or may not exert their influence in support of the organization
leadership styles
Autocratic leadership
task-oriented leadership style in which workers are told what to do and how to accomplish it without having a say in the decision-making process
Participative leadership
leadership style in which all members of a team are involved in identifying essential goals and developing strategies to reach those goals
Laissez-faire leadership
a hands-off leadership style that provides direction, tools, and resources to employees while delegating responsibility and decision-making authority to them
Transformational leadership
leadership style that focuses on transforming organizations and industries
Transactional leadership
leadership style that emphasizes structure, performance and productivity, and reward systems
charismatic leadership
personality-dependent leadership style

What are the steps in the managerial decision-making process?
identifying the problem or opportunity
generating alternatives
selecting an alternative
implementing and evaluating the solution

dentifying the problem or opportunity
generating alternatives
selecting an alternative
implementing and evaluating the solution

What is Total Quality Management? How do organizations benefit from it?

the coordination of efforts directed at improving customer satisfaction, increasing employee participation, strengthening supplier partnerships, and facilitating an organizational atmosphere of continuous quality improvement

Chapter 9

Describe the three phases of the human resources management process. What are the key activities involved in each phase?

Recruiting
the process of attracting qualified job applicants
External
Internal
Selecting
the process of gathering information about applicants for a position and then using that information to choose the most appropriate applicant
Includes:
Employment Applications
Employment Tests
Interviews
References
Assessment Centers
Onboarding
the process of integrating new employees into an organization
includes
orientations

What are the major differences between a job description and a job specification?

Job description
duties to be performed, the working conditions, the responsibilities, and the tools and equipment that must be used on the job
Job specifications
list of the qualifications required to perform a particular job, such as certain skills, abilities, education, experience, and personality characteristics

Explain the process of recruiting and the benefits and drawbacks of both internal and external recruiting.

Consider current employees as applicants for available position
Job posting, or informing current employees of upcoming opening
Look for external recruits
Internal recruitment
considering current employees as applicants for available positions
Benefits
strong motivation for current employees
firm retains quality personnel along with their experience
Downturns
leaves another position open
train two employees instead of one
External recruitment
attracting job applicants from outside an organization
Benefits
it brings people into a firm who have new perspectives and varied business backgrounds
hiring younger talent tend to be more technologically savvy
Disadvantage
expensive
may provoke resentment among present employees who wish to advance within the company

What are some techniques used in employee selection?

Employment Applications
collecting factual information on a candidate’s education, work experience, and personal history
Employment Tests
focus on aptitudes, skills, abilities, or knowledge relevant to the job
Interviews
provides an opportunity for applicants and the firm to learn more about one another
References
A job candidate generally is asked to furnish the names of references—people who can verify background information and provide personal evaluations
Assessment Centers
used to select current employees for promotion to higher-level positions

What are the primary elements of employee compensation and benefits?

must be able to
enable employees to satisfy basic needs,
provide rewards comparable with those offered by other firms,
be distributed fairly within the organization, and
recognize that different people have different needs

What is the purpose of a performance appraisal?

the evaluation of employees’ performance to allow managers to make objective human resources decisions

Chapter 10

Explain what motivation is and how it is different from employee morale.

the individual internal process that energizes, directs, and sustains behavior; the personally “force” that causes you or me to behave in a particular way
Differs because:
morale is employees feelings about the job

What is meant by a "piece-rate system"?

A system that would pay an employee a certain amount for each unit of output they produce
If the quota is exceeded, they receive a higher per unit rate for all work produced

Who developed the Hierarchy of Human Needs Theory, and what are the five categories of needs discussed?

Abraham Maslow developed Maslow’s hierarchy of needs
includes
physiological needs
safety needs
social needs
esteem needs
self-actualization needs

Describe the idea behind Herzberg's Motivation-Hygiene Theory.

The idea that satisfaction and dissatisfaction are separate and distinct dimensions
There are different factors that affect an employee's motivation

Describe the idea behind McGregor's Theory X and Theory Y concepts.

Theory X: consistent with Taylor’s ideas about scientific management
People dislike work and try to avoid it.
Because people dislike work, managers must coerce, control, and frequently threaten employees to achieve organizational goals.
People generally must be led because they have little ambition and will not seek responsibility; they are concerned mainly about security.
Theory Y: employee motivation generally consistent with the ideas of the human relations movement
People do not naturally dislike work. In fact, work is an important part of all of our lives.
People will work toward goals to which they are committed.
People become committed to goals when it is clear that accomplishing the goals will bring personal rewards.
People often seek out and willingly accept responsibility.
Employees have the potential to help accomplish organizational goals.
Organizations generally do not make full use of their human resources.

Describe the premises behind Reinforcement Theory, Equity Theory, and Expectancy Theory.

Reinforcement theory
a theory of motivation based on the premise that rewarded behavior is likely to be repeated, whereas punished behavior is less likely to recur
positive reinforcement
strengthens desired behavior by providing a reward, such as praise or recognition from supervisors for a job done well
negative reinforcement
strengthens desired behavior by eliminating an undesirable task or situation
punishment
a consequence of undesirable behavior.
extinction
hope to eliminate undesirable behavior by not responding to it with the hope that the behavior will eventually go “extinct.”
Equity theory
a theory of motivation based on the premise that people are motivated to obtain and preserve equitable treatment for themselves
inputs
time, effort, skills, education, experience, and so on that we contribute to the organization
outcomes
the rewards we get from the organization, such as pay, benefits, recognition, and promotions
ratios should be equal for a equitable relationship
Expectancy theory
a model of motivation based on the assumption that motivation depends on how much we want something and on how likely we think we are to get it

What are some current techniques for increasing employee motivation (e.g. flextime, job enrichment)?

Management by Objectives (MBO)
a motivation technique in which managers and employees collaborate in setting goals
Job enrichment
a motivation technique that provides employees with more variety and responsibility in their jobs
Job enlargement
expanding a worker’ s assignments to include additional but similar tasks
Job redesign
a type of job enrichment in which work is restructured to cultivate the worker–job match
Behavior modification
a systematic program of reinforcement to encourage desirable behavior
Flextime
a system in which employees set their own work hours within employer-determined limits
Compressed workweek
allows employees to work a 40-hour work week in four days instead of five
Part-time work
permanent employment in which individuals work less than a standard work week
Job sharing
an arrangement whereby two people share one full time position
Telecommuting
working remotely all the time or for a portion of the work week
Employee empowerment
employees more involved in their jobs and in the operations of the organization by increasing their participation in decision making
Employee ownership
a situation in which employees own the company they work for by virtue of being stockholders

Define "team," and describe several types of teams.

two or more workers collaborating to achieve a shared mission, goal, or work product
virtual team
a team consisting of members who are geographically dispersed but communicate electronically
problem-solving team
a team of knowledgeable employees brought together to tackle a specific problem
cross-functional team
a team of individuals with varying specialties, expertise, and skills who are brought together to achieve a common task

What are the five stages of team development?

Forming
Storming
Norming
Performing
Adjourning

Chapter 11

What is marketing?

the process of identifying customer needs, developing and offering products or services that meet those needs, and communicating the value of those offerings to potential customers

Why is customer relationship management important?

using information about customers to create marketing strategies that develop and sustain desirable customer relationships

What is utility as it relates to marketing, and what are the four forms of utility?

the ability of a good or service to satisfy a human need
Include
form
place
time
possession

What is meant by the term "target market"?

a group of individuals or organizations, or both, for which a firm develops and maintains a marketing mix suitable for the specific needs and preferences of that group

Describe how the undifferentiated, concentrated, and differentiated approaches for selecting a target market might be used.

Undifferentiated
directing a single marketing mix at the entire market for a particular product
concentrated
market segmentation, a single marketing mix is directed at a single market segment
differentiated
multiple marketing mixes are focused on multiple market segments

What are some common bases of market segmentation?

What are the four elements of the marketing mix, and how do they fit together to form a marketing strategy?

product
relate to the product’s design, functions, features, brand name, packaging, and warranties
price
concerned with both base prices and discounts
distribution
involves not only transportation and storage, but also intermediaries
promotion
providing information to target markets

What are the stages in the development of a marketing plan?

a written document that specifies an organization’s resources, objectives, strategy, and implementation and control efforts to be used in marketing a specific product or product group

What is marketing research?

the process of systematically gathering, recording, and analyzing data concerning a particular marketing problem

Explain the steps in the consumer buying decision process.

Chapter 12

What are the two general categories of product classification, and what determines the classification of an item?

Consumer
Convenience
a relatively inexpensive, frequently purchased item for which buyers want to exert only minimal effort
Shopping
an item for which buyers are willing to expend considerable effort on planning and making the purchase
Specialty
unique characteristics for which a significant group of buyers is willing to expend considerable purchasing effort
Unsought
an item that people do not plan on purchasing, such as one that addresses a sudden problem or that customers are unaware of until they see it in a store or online
Business
raw materials
a basic material that becomes part of a physical product; usually comes from mines, forests, oceans, or recycled solid wastes
major equipment
large tools and machines used for production purposes
accessory equipment
standardized equipment used in a firm’s production or office activities
component parts
an item that becomes part of a physical product and is either a finished item ready for assembly or a product that needs little processing before assembly
process material
a material that is used directly in the production of another product but is not readily identifiable in the finished product
supply
an item that facilitates production and operations but does not become part of a finished product
business service
an intangible product that an organization uses in its operations

Describe the stages of the product life cycle and how they can lead to new product development and/or product modifications.

introduction
based on buy behavior modify the product
growth
firms offer modified versions of the product and expands distribution
maturity
market share may be strengthened by redesigned packaging or style changes
decline
no heavy spending on promotion, although it may use some advertising and sales incentives to slow the product’s decline

Define product line and product mix, and distinguish between the two.

Product line
a group of similar products that differ only in relatively minor characteristics
product mix
all the products a firm offers for sale

What are the phases of new product development?

idea generation
screening
concept testing
business analysis
technical development
test marketing
commercialization

Differentiate between a brand, a brand name, a brand mark, and a trademark.

brand
a name, term, symbol, design, or any combination of these that identifies a seller’s products as distinct from those of other sellers
brand name
the part of a brand that can be spoken
brand mark
the part of a brand that is a symbol or distinctive design
trademark
a brand name or brand mark that is registered with the U.S. Patent and Trademark Office and thus is legally protected from use by anyone except its owner

Describe the types of brands, the benefits of branding, and branding strategies.

types of brands
manufacturer (or producer) brand
brand a brand that is owned by a manufacturer
store (or private) brand
a brand that is owned by an individual wholesaler or retailer
generic product/brand
a product with no brand at all
benefits of branding
easily recognizable, they reduce the amount of time buyers spend on shopping, as they can quickly identify the brands they prefer
identify with a certain lifestyle characteristics and values
psychological reward from owning a brand that symbolizes status
new product that carries a familiar brand name
creation of brand loyalty
branding strategies
individual
family

What is an express warranty?

a written explanation of the producer’s responsibilities in the event that a product is found to be defective or otherwise unsatisfactory

Explain the meaning and use of price.

consumers’ desires and expectations are balanced with a firm’s need to make a profit

Chapter 13

Describe integrated marketing communications.

coordination of promotion efforts to ensure maximal informational and persuasive impact on customers

What is the role of promotion?

intended to inform, persuade, or remind target-market members

Identify and describe the four major elements of the promotion mix.

advertising
a paid nonpersonal message communicated to a select audience through a mass medium
personal selling
personal communication aimed at informing customers and persuading them to buy a firm’s products
sales promotion
the use of activities or materials as direct inducements to customers or salespersons
public relations
communication activities used to create and maintain favorable relationships between an organization and various public groups, both internal and external

What are the advantages and disadvantages of the major advertising media?

Adv
most effective and least expensive means to a large number of individuals and organizations.
encourages competition for new and improved products, wider product choices, and lower prices.
revenues support mass-communication media—internet, television, newspapers, magazines, and radio, effectively paying for news coverage and entertainment programming.
provides job opportunities in fields ranging from sales to film production.

List some sales promotion methods, and discuss what factors enter into marketing decisions about which and how many sales promotion methods to use.

consumer sales promotion method
a sales promotion method designed to attract consumers to particular retail stores and to motivate them to purchase certain new or established products
trade sales promotion method
a sales promotion method designed to encourage wholesalers and retailers to stock and actively promote a manufacturer’s product

What factors influence the selection of promotion-mix elements in a promotional campaign?

target audience, product characteristics, marketing objectives, budget, and competitive landscape

Chapter 17

What is accounting? Who are the main users of accounting information?

the process of systematically collecting, analyzing, and reporting financial information
Users:
managers and employees
investors
financial analysts
lenders
suppliers
government agencies
other interested groups must be able to “trust the numbers.”

What is the purpose of an audit? What is meant by GAAP?

an examination of a company’s financial statements and the accounting practices that produced them
Generally Accepted Accounting Principles

What is the accounting equation?

Assets=Liabilities+Owners’ ⁢equity

Describe the steps in the accounting cycle. What is the purpose of a trial balance?

collecting
analyzing
reporting financial information

a negative balance of trade

What are the three key financial statements generated by the accounting process? Describe the purpose of each statement and what type of information is included.

balance sheet
a summary of the dollar amounts of a firm’s assets, liabilities, and owners’ equity accounts at the end of a specific accounting period
income statement
a summary of a firm’s revenues and expenses during a specified accounting period
statement of cash flows
a statement that illustrates how the company’s operating, investing, and financing activities affect cash during an accounting period

What are assets? What is the difference between current assets, fixed assets, and intangible assets? Give some examples of each.

the resources that a business owns
current assets
assets that can be converted quickly into cash or that will be used in one year or less
fixed assets
assets that will be held or used for a period longer than one year
EX. include land, buildings, and equipment
intangible assets
assets that do not exist physically but that have a value based on the rights or privileges they confer on a firm
EX. patents, copyrights, trademarks and brands, and goodwill

What is depreciation?

the process of apportioning the cost of a fixed asset over the period during which it will be used

What are liabilities? What is the difference between current liabilities and long-term liabilities? Give some examples of each.

the process of apportioning the cost of a fixed asset over the period during which it will be used
Current liabilities
debts that will be repaid in one year or less
EX.
Accounts payable are short-term obligations that arise as a result of a firm making credit purchases
Notes payable are obligations that have been secured with promissory notes
Long-term liabilities
debts that need not be repaid for at least one year
EX
mortgage payable

What is owners' or stockholders' equity? What are retained earnings of a corporation?

the difference between a firm’s assets and its liabilities
Retained earnings
the portion of a business’s profits not distributed to stockholders

What are the three different activities by which the statement of cash flows are organized?

Cash flows from operating activities.
firm’s primary revenue source—providing goods and services
Cash flows from investing activities
concerned with cash flow from investments
Cash flows from financing activities
cash flow from all financing activities

What are financial ratios? How are financial ratios used to evaluate a business?

a number that shows the relationship between two elements of a firm’s financial statements
Net profit margin
indicates whether the firm is profitable
current ratio
firm’s ability to pay its current liabilities
inventory turnover
the number of times the firm sells its merchandise inventory in one year

Chapter 19

What are some uses for short-term financing? For long-term financing?

Short-term financing
cash flow problems
speculative production
the production of goods which is followed by a time lag before the actual sale of those goods
Current inventory needs
Monthly expenses
Short-term promotional needs
Unexpected emergencies
Long-Term Financing
Business start-up costs
Mergers and acquisitions
New product development
Long-term marketing activities
Replacement of equipment
Expansion of facilities

What is cash flow? What is the ideal cash flow for a business?

the movement of money into and out of an organization
sufficient money coming into the firm in any period to cover the firm’s expenses during that period

What is meant by the risk-return ratio?

a ratio based on the principle that a high-risk decision should generate higher financial returns for a business and more conservative decisions often generate lower returns

What are the steps in effective financial planning?

What is the budget? Explain the different types of budgets a business may use and how each is developed.

a financial statement that projects income, expenditures, or both over a specified future period
cash budget
a financial statement that estimates cash receipts and cash expenditures over a specified period
capital budget
a financial statement that estimates a firm’s expenditures for major assets and its long-term financing needs
Zero-base budgeting
a budgeting approach in which every expense in every budget must be justified

What is the difference between equity capital and debt capital? Give examples along with the advantages and disadvantages of each form.

equity capital
money received from the owners or from the sale of shares of ownership in a business
debt capital
borrowed money obtained through loans of various types

What is an initial public offering (IPO)? How does a business use an IPO to raise capital?

occurs when a corporation sells common stock to the general public for the first time
gets business to initially invest into the new corporation’s stock

What are dividends?

a distribution of earnings to the stockholders of a corporation

What are some differences between common stock and preferred stock?

Common stock
dividend payments occurs second
voting rights
Preferred stock
dividends paid first
not voting right

Describe the features of bonds (e.g. convertible, sinking fund, maturity date, etc.).

maturity date
the date on which a corporation is to repay borrowed money
Types of bonds:
debenture bond
a bond backed only by the reputation of the issuing corporation
mortgage bond
a corporate bond secured by various assets of the issuing firm
convertible bond
a bond that can be exchanged, at the owner’s option, for a specified number of shares of the corporation’s common stock
Repayment
bond indenture
a legal document that details all the conditions relating to a bond issue
serial bonds
a sum of money to which deposits are made each year for the purpose of redeeming a bond issue
sinking fund
a sum of money to which deposits are made each year for the purpose of redeeming a bond issue
trustee
an individual or an independent firm that acts as the bond owners’ representative

Chapter 20