business ch 6-10

Sole proprietorship

Sole proprietorship

A form of business ownership with a SINGLE owner who actively manages the company.

Partnership

A voluntary agreement under which two or more people act as co-owners of a business for profit.

General partnership

A partnership in which ALL partners can take an active role in managing the business and have unlimited liability for claims against the firm.

Corporation

Form of business ownership in which the business is considered a legal entity separate from its owners.

Articles of incorporation

The document filed with the state government to establish the existence of a new corporation.

Limited liability

Owners are not personally liable for claims against their firm; they may lose their investment in the company, but other personal assets are protected.

Limited liability company (LLC)

A form of business ownership that offers limited liability to its owners and flexible tax treatment.

Limited partnership

A partnership that includes at least one general partner managing the company with unlimited liability and one limited partner who gives up the right to manage in exchange for limited liability.

Limited liability partnership (LLP)

All partners have the right to participate in management and have limited liability for company debts.

C corporation

The most common legal business entity that offers limited liability to its owners, called stockholders.

Corporate bylaws

The basic rules of governing how a corporation is organized and how it conducts business.

Stockholders

Owners of a corporation.

Institutional investor

An organization that pools contributions from investors and uses these funds to buy stocks and other securities.

Board of directors

Individuals elected by stockholders of a corporation to represent their interests.

S corporation

A form of corporation that avoids double taxation by having its income taxed as if it were a partnership.

Statutory close corporation

A corporation with a limited number of owners that operate under simpler, less formal rules than a C corporation.

Non-profit corporation

A corporation that does not seek to earn a profit and differs in several respects from a C corporation.

Acquisition

Corporate restructuring in which one firm buys another.

Horizontal merger

A combination of two firms that are in the same industry.

Vertical merger

A combination of firms at different stages in the production of goods or services.

Conglomerate merger

A combination of two firms that are in unrelated industries.

Merger

Corporate restructuring occurring when two formerly independent business entities combine to form a new organization.

Divestiture

Transfer of total or partial ownership of some of a firm’s operations to investors or another company.

Franchise

Licensing arrangement where a franchisor allows franchisees to use its name, trademark, products, business methods, and other property in exchange for monetary payments.

Franchisor

Business entity in a franchise relationship that allows others to operate its business using provided resources in exchange for payments.

Franchisee

The party in a franchise relationship that pays for the right to use resources supplied by the franchisor.

Distributorship

Type of franchising arrangement where the franchisor makes a product and licenses the franchisee to sell it.

Business format franchise

Broad franchise agreement where the franchisee pays for the right to use the franchisor's name, trademark, and production methods.

Franchise agreement

Contractual arrangement between a franchisor and franchisee that spells out the duties and responsibilities of both parties.

Franchise disclosure document (FDD)

Detailed description of all aspects of a franchise that the franchisor must provide to the franchisee at least 14 days before signing.

Entrepreneurs

People who risk their time, money, and other resources to start and manage a business.

Internal locus of control

A deep-seated sense that the individual is personally responsible for what happens in his or her life.

External locus of control

A deep-seated sense that forces other than the individual are responsible for what happens in his or her life.

Angel investors

Individuals who invest in startup companies with high growth potential in exchange for shared ownership.

Venture capital firms

Companies that invest in startup businesses with high growth potential in exchange for a share of ownership.

Market niche

A small segment of a market with fewer competitors than the market as a whole; tends to be attractive to small firms.

Small Business Administration (SBA)

An agency of the federal government designed to maintain and strengthen the nation's economy by aiding small businesses.

Small Business Development Centers (SBDC)

Local offices affiliated with the SBA that provide comprehensive management assistance to small business owners.

SCORE (Service Corps of Retired Executives)

An organization affiliated with the SBA that provides free business counseling for small business owners from qualified retired executives.

Business plan

A formal document that describes a business concept, outlines core business objectives, and details strategies and timelines for achieving those objectives.

Accounting

A system for recognizing, organizing, analyzing, and reporting information about financial transactions affecting an organization.

Financial accounting

The branch of accounting that prepares financial statements for use by external stakeholders.

Generally accepted accounting principles (GAAP)

A set of accounting standards used in the preparation of financial statements.

Financial Accounting Standards Board (FASB)

The private board that establishes GAAP used in financial accounting.

Balance sheet

A financial statement that reports a firm's financial position by identifying and reporting the value of its assets, liabilities, and owners' equity.

Accounting equation

Assets = Liabilities + Owners' equity.

Assets

Resources owned by a firm.

Liabilities

Claims that outsiders have against a firm’s assets.

Owners' equity

The claims a firm's owners have against their company’s assets.

Income statement

Financial statement reporting a firm's revenues, expenses, and net income resulting from operations over a period.

Revenue

Increases in a firm’s assets resulting from sales of goods or services.

Accrual-basis accounting

Accounting method recognizing revenue when earned and matching expenses to the revenues they helped produce.

Expenses

Resources used up as a result of business operations.

Net income

The difference between the revenue earned and expenses incurred during a time period.

Statement of cash flows

Financial statement identifying a firm’s sources and uses of cash in a given period.

Horizontal analysis

Analysis comparing account values on financial statements over two or more years to identify changes and trends.

Budgeting

A management tool showing how a firm will acquire and use resources needed to achieve goals over a period.

Operating budgets

Budgets communicating an organization's sales and production goals.

Financial budgets

Budgets focusing on the firm's financial goals.

Master budget

Presentation of operational and financial budgets representing the firm's overall plan for a specified period.

Managerial (or management) accounting

Branch of accounting providing reports and analysis to managers for informed business decisions.

Cost

The value of what is given up in exchange for something.

Out-of-pocket cost

A cost that involves the payment of money or resources.

Implicit cost

Opportunity cost that arises when a firm uses owner-supplied resources.

Fixed cost

Costs that remain the same when production levels change within a relevant range.

Variable cost

Costs that vary directly with production levels.

Direct cost

Costs incurred directly as a result of some specific cost object.

Indirect cost

Costs resulting from general operations not directly tied to any specific cost object.

Activity-based costing (ABC)

A technique to assign product costs based on links between activities driving costs and production of specific products.

Financial capital

Funds a firm uses to acquire assets and finance operations.

Finance

The functional area of business concerned with finding the best sources and uses of financial capital.

Risk

The degree of uncertainty regarding the outcome of a decision.

Risk-return trade-off

The observation that financial opportunities offering high returns are generally riskier.

Financial ratio analysis

Computing ratios that compare values of key accounts on financial statements.

Liquid asset

An asset that can quickly be converted into cash with little risk of loss.

Liquidity ratios

Financial ratios measuring a firm's ability to obtain cash to pay short-term obligations.

Asset management ratios

Financial ratios measuring how effectively a firm uses its assets to generate revenues.

Financial leverage

The use of debt in a firm’s capital structure.

Leverage ratios

Ratios measuring the extent to which a firm relies on debt financing.

Profitability ratios

Ratios measuring the rate of return a firm earns on various investments.

Budgeted income statement

Projection showing how a firm's budgeted sales and costs will affect expected net income.

Budgeted balance sheet

Projected statement forecasting the types and amounts of assets a firm will need.

Cash budget

Detailed forecast of future cash flows helping identify temporary cash shortages or surpluses.

Trade credit

Spontaneous financing granted by sellers when delivering goods without requiring immediate payment.

Spontaneous financing

Financing arising naturally during the course of business without special arrangements.

Factor

A company providing short-term financing by purchasing accounts receivables at a discount.

Line of credit

Financial arrangement where a bank pre-approves credit up to a limit.

Revolving credit agreement

A guaranteed line of credit providing funds up to a specified credit limit during the term.

Commercial paper

Short-term, usually unsecured promissory notes issued by large corporations.

Retained earnings

The part of a firm’s net income reinvested in the firm.

Covenant

Restriction lenders impose on borrowers as a condition of providing long-term financing.

Equity financing

Funds provided by the owners of a company.

Debt financing

Funds provided by lenders.

Capital structure

The mix of equity and debt financing a firm uses for permanent financing needs.

Dodd-Frank Act

Act strengthening government oversight of financial markets, limiting risky strategies.

Cash equivalents

Safe, highly liquid assets often listed with cash holdings on balance sheets.

U.S. Treasury bills

Short-term marketable IOUs issued by the federal government.

Money market mutual funds

Mutual funds pooling funds to buy safe, highly liquid securities.

Capital budgeting

The process a firm uses to evaluate long-term investment proposals.

Time value of money

The principle that a dollar received today is worth more than a dollar received in the future.