Small Business Management Exam 2 Content

Markup

The difference between merchandise cost and selling price.

Markdown

A reduction of selling price below the original selling price.

Merchandise

Goods to be sold.

Supplies

Items needed to perform duties.

What should you look for when choosing a vendor?

quality, competitive prices, product options, delivery services, discounts, types of assistance, consignment, liability insurance or vendor’s endorsement.

Economic Order Quantity (EOQ)

The quantity to be purchased to minimize total cost.

EOQ Formula

sq. rt. (2 x annual demand x ordering cost) / 2.

COGS

Cost of goods sold.

Age of Inventory

The average time required to sell inventory.

Inventory Turnover Formula

COGS / Avg. Inv.

Average Inventory Formula

Beginning cost + End Cost / 2.

Age of Inventory Formula

365 / Inv. Turn.

Pricing Policy - Supply and Demand

Basic economics of pricing, economic fluctuations impact the price of goods and services.

Robust Economy

Higher prices.

Depress Economy

Lower prices.

Pricing Policy - Nature of the Product/Service

The “nature” of the product impacts pricing due to its perceived value and market conditions.

Pricing Policy - Types of Merchandise

A higher price can be demanded if the merchandise takes up excessive space or resources in order to make it profitable.

Pricing Policy - Competition Pricing

It is important to consider the pricing of your competitors to attract more business.

Pricing Policy - Marketing Strategy

Price your business for a high profile or low profile clientele.

Pricing Policy - Distribution Methods

The cost associated with distributing the goods/services.

Pricing Policy - Legislation & Regulation

Fair trade laws and tax requirements may impact your pricing.

Pricing Policy - Target Market

The current and desired clientele should be considered in pricing.

Pricing Policy - Perceived Value

The absence of value will always lead to purchases based solely on price.

Pricing Policy - Purchasing Practices

Seeking reputable vendors, taking advantage of discounts, and making purchases that will allow you to offer quality goods/services to your clientele at a fair price.

Pricing Policy - Market Fluctuations

As supply and demand change and as the cost of raw materials changes, your prices will need to change according to the economy.

Pricing Policy - Business Conditions

Market conditions, business’s financial situation, product/service characteristics, customer behaviors, and competitive landscape.

Accounting

A language of business employed to communicate financial info based on analyzing, recording, classifying, summarizing, reporting, and interpreting financial data.

Cash Basis Accounting

Revenue is not recognized in the accounting records until it is received and expenses are not recognized until they are paid. No accounts receivable and no accounts payable.

Accrual Accounting

All revenue and expenses are recognized even if they have not been received or paid. Has accounts receivable for revenue that has not been earned and accounts payable for expenses that have not been paid.

Generally Accepted Accounting Principles (GAAP)

A set of standards set out by the Financial Accounting Standards Board.

Accounting Formula

Assets = Liabilities + Owner’s Equity.

Double Entry Accounting

Uses the accounting formula to show the relationship between assets, liability, and equity. Must be balanced, and therefore affects at least 2 accounts.

Assets

Items of monetary value owned by a business.

Liabilities

Debts to other business entities or people for goods/services already received.

Owner’s Equity (Capital, Net Worth)

The amount by which the total assets exceed the total liabilities of a business.

Owner’s Equity Umbrella

Withdrawals (drawing), expenses, revenue. temporary accounts because they are closed annually.

Drawing and expenses _____ owner’s equity.

Decreases.

Revenue _____ owner’s equity.

Increases.

Drawing (Withdrawal)

A separate owner’s equity account for personal use.

Expenses

A decrease in assets other than withdrawals by the owner.

Revenue

Income or inflow of assets as a result of selling a product or providing a service.

Expanded Accounting Formula

A = L + OE - Draw + Rev - Exp.

T Accounts

Unofficial records used to help match credits and debits of a transaction.