CH.6 

Sole proprietorship – a form of business ownership with a SINGLE owner who usually 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 any claims against the firm 

Corporation – form of business ownership in which the business is considered a legal entity that is separate and distinct from its owners 

Articles of incorporation – the document filled with a state government to establish the existence of new corporation  

Limited liability – when owners are not personally liable for claims against their firm. They may lose investment in company, but other personal assets are protected.  

Limited liability company – a form of business ownership that offers both limited liability to its owners and flexible tax treatment  

Limited partnership – partnership that includes at least one general partner that manages the company and accepts unlimited liability and one limited partner that gives up the right to actively manage the company 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 – most common in which legal business entity that offers limited liability to all its owners, who are called stockholders 

Corporate bylaws – the basic rules of governing how a corporation is organized and how it conducts business 

Stockholders – an owner of a corporation  

Institutional investor – an organization that pools contributions from investors, clients, or depositors and uses these funds to buy stocks and other securities  

Board of directors – the individuals who are 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  

Statuary close corporation – corporation with a limited number of owners that operate under simpler, less formal rules than a C corporation  

Non profit – corporation that does not seek to earn a profit and differs in several fundamental respects from C corporation  

Acquisition – corporate reconstructing in which one firm buys another  

Horizontal merger – a combination of 2 firms that are in the same industry  

Vertical merger – a combination of firms at different stages in the production of good or service  

Conglomerate merger – combination of 2 firms that are unrelated industries  

Merger – corporate restructuring that occurs 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 operation to investors or to another company  

Franchise – licensing arrangement under which a franchisor allows franchisees to use its name, trademark, products, business methods, and other property in exchange for monetary payments and other considerations 

Franchisor – business entity in a franchise relationship that allows others to operate its business using resoiurce it supplies in exchange for money and other considerations  

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

Distributorship – type of franchising arrangement in which the franchisor makes a product and licenses the franchisee to sell it  

Business format franchise – broad franchise agreement in which the franchisee pays for the right to use the name, trademark, and business and production methods of the franchisor  

Franchise agreement – the contractual arrangement between a franchisor and franchisee that spells out the duties and responsibilities of both parties 

Franchise disclosure document (FDD) - a detailed description of all aspects of a franchise that the franchisor must provide to the franchisee at least 14 calendar days before the franchise agreement is signed   

CH. 7  

Entrepreneurs – people who risk their time, money, and other resources to start and manage a business 

Internal locus of control – a deep seated scene 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 responsible for what happens in his or her life  

Angel investors – individuals who invest in start up companies with high growth potential in exchange for shared ownership  

Venture capital firms – companies that invest in start-up business 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 with fewer competitors than the market with fewer competitors than the market as a whole. Market niches tend to be quite attractive to small firms  

Small business administration – an agency of the federal government designed to maintain and strengthen the nations economy by aiding, counseling, assisting, and protecting the interests of small businesses 

Small business development centers – local offices affiliated with small businesses administration that provide comprehensive management assistance to current and prospective small business owners 

SCORE (service corps of retired executives) - an organization affiliated with the Small Business Administration that provides free, comprehensive business counseling for small business owners from qualified  

Business plan – a formal document that describes a business concept, outlines core business objectives, and details strategies and timeline for achieving those objectives 

CH. 8  

Accounting – a system for recognizing, organizing, analyzing, and reporting information about the financial transactions that affect an organization  

Financial accounting – the branch of accounting that prepares financial statements for use by owners, creditors, suppliers and other external stakeholders 

Generally accepted accounting principles – a set off accounting standards that is used in the preparation of financial statements  

Financial accounting standards board – the private board that establishes the generally accepted acquainting principles used in the practice of financial accounting  

Balance sheet – a financial statement that reports the financial postion of a firm by identifying and reporting the value of the firm’s assets, liabilities, and owners’ equity  

Accounting equation – assets = liability + Owners’ equity  

Assets – resources owned by a firm  

Liabilities – claims that outsides have against a firm’s assets  

Owners' equity – the claims a firm’s owners have against their company’s assets (often called “stockholders’ equity” on balance sheets corporations  

Income statement – the financial statements that reports the revenues, expenses, and net income that resulted from a firm’s operations over an accounting period  

Revenue – increases in a firm’s assets that result from the sale of goods, provisions of services or other activities intended to earn  

Accrual-basis accounting – the method of accounting that recognizes revenue when it is earned and matches expenses to the revenues they helped produce  

Expenses – resources that are used up as the result of business operations  

Net income – the difference between the revenue a firm earns and the expenses it incurs in a given time period  

Statement of cash flows – the financial statement that identifies a firm’s sources and uses of cash in a given accounting period  

Horizontal analysis – analysis of financial statements that compares account values reported on these statements over two or more years to identify changes and trends  

Budgeting – a management tool that shows how a firm will acquire and use the resources needed to achieve its goals over a specific time period  

Operating budgets – budgets that communicate an organization’s sales and production goals and the resources needed to achieve these goals  

Financial budgets – budgets that focus on the firm’s financial goals and identify the resources needed to achieve these goals  

Master budget – a presentation of an organizations operational and financial budgets that represent the firm’s overall plan of action for a specified time period  

Managerial (or management accounting) - the branch of accounting that provides reports and analysis to managers to help them make 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 other resources 

Implicit cost – the opportunity cost that arises when a firm uses owner – supplied resources  

Fixed cost – costs that remain the same when the level of production changes within some relevant range  

Variable cost – costs that vary directly with the level of production  

Direct cost – costs that are incurred directly as the result of some specific cost object  

Indirect cost – costs that are the result of a firm’s general operations and are not directly tied to any specific cost object  

Activity-based costing (ABC) - a technique to assign  product cots based on links between activities that drive costs and the production of specific products  

CH. 9  

Financial capital – the funds a firm uses to acquire its assets and finance its operations 

Finance – the functional area of business that is 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 that offer high rates of return are generally riskier than opportunities that offer lower rates of return  

Financial ratio analysis – computing ratios that compare values of key accounts listed on a firm’s financial statements  

Liquid asset – an asset that can quickly be converted into cash with little risk of loss 

Liquidity ratios – financial ratios that measure the ability of a firm to obtain the cash it needs to pay its short-term debt obligations as they come due  

Asset management ratios – financial ratios that measure how effectively a firm is using its assets to generate revenues or cash  

Financial leverage – the use of debt in a firm’s capital structure  

Leverage ratios – ratios that measure the extent to which a firm relies on debt financing in its capital structure  

Profitability ratios-ratios that measure the rate of return a firm is earning on various measures of investment  

Budgeted income statement – a projection showing how a firm’s budgeted sales and costs will affect expected net income (also called pro forma) 

Budgeted balance sheet – a projected statement that forecasts the types and amounts of assets a firm will need to implement its future plans and how the firm will finance those assets  

Cash budget – a detailed forecast of future cash flows that help financial managers identify when their firm is likely to experience temporary shortages or surpluses of cash  

Trade credit – spontaneous financing granted by sellers when they deliver goods and services to customers without requiring immediate payment  

Spontaneous financing – financing that arises during the natural course of business without the need for special arrangements    

Factor – a company that provides short term financing to firms by purchasing their accounts receivables at a discount  

Line of credit – a financial arrangement between a firm and a bank in which the bank pre-approves credit up to a specified limit, the firm must maintain an acceptable credit rating  

Revolving credit agreement- a guaranteed line of credit in which a bank makes a binding commitment to provide a business with funds up to a specified credit limit at any time during the term of the agreement  

Commercial paper – short term and usually unsecured promissory notes issued by large corporations  

Retained earnings – the part of a firm’s net income it reinvests  

Covenant – a restriction lenders impose on borrowers as a condition of providing long-term debt 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 to meet its permanent financing needs  

Dodd-frank act – act that strengthened government oversight of financial markets and placed limitations on risky financial strategies such as heavy reliance on leverage  

Cash equivalents – safe and highly liquid assets that many firms list with their cash holding on their balance sheet  

U.S treasury bills – short term marketable IOU’s issued by the federal government  

Money market mutual funds – a mutual fund that pools funds from many investors and uses these funds to purchase very 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   

Certificate of deposit – an interest owning deposit that requires the funds to remain deposited for a fixed term. Withdrawals equal penalty  

Present value – the amount of money that, invested today at a given rate of interest would grow because some future amount in a specified number of time periods  

Net present value – the sum of the present values of expected future cash flows from an investment, minus the cost of that investment  

CH.10 

Financial markets – markets that transfer funds from savers to borrowers  

Depository institutions – a financial intermediary that obtains funds by accepting checking and savings deposits and then lending those funds to borrowers 

Credit union – a depository institution that is organized as a corporative, meaning that it is owned by its depositors  

Savings and loans association – a depository institution that has traditionally obtained most of its funds by accepting savings deposits, which have been used primarily to make mortgage loans  

Securities brokers – a financial intermediary who acts as an agent from investors who wants to buy and sell financial securities  

Securities dealer – financial intermediary who participates directly in securities market, buying and selling stock and other securities for its own account  

Investment bank – financial intermediary that specializes in helping firms raise financial capital by issuing securities in primary market  

Federal reserve act of 1913 – the law that established the federal reserve system as the central bank of the United States 

Banking act of 1933 – law that established the FDIC to ensure bank deposits. Prohibited commercial banks from selling insurance or acting investment banks 

Securities act of 1933- first major federal law regulating the securities industry  

Securities and change act of 1934 – federal law that deals with securities regulation that established the Securities and Exchange Commission to regulate oversee the securities industry  

Securities and exchange commission – the federal agency with primary responsibility for regulating the securities industry  

Financial services modernization act of 1999 – an act that overturned the section of Banking Act of 1933 that prohibited commercial banks from selling insurance or performing the functions of investment banks  

Common stock – the basic form of ownership in a corporation  

Capital gain – the return on an asset that results when its market prices rises above the price the investor paid for it 

Preferred stock – a type of stock that gives its holder preference over common stockholders in terms of dividends and claims on assets 

Bond –a formal debt instrument issued by a corporation or government entity  

Maturity date – the date when a bond will come due  

Par value (of a bond) - the value of a bond at its maturity; what the issuer promises to pay the bondholder when the bond matures 

Coupon rate – the interest paid on a bond, expressed as a percentage of the bond’s par value  

Current yield – the amount of interest earned on a bond, expressed as a percentage of the bonds current market price  

Convertible security – a bond or share of preferred stock that gives its holder the right to exchange it for a stated number of shares of common stock  

Financial diversification – a strategy of investing in a wide variety of securities in order to reduce risk  

Mutual fund – an institutional investor that raises funds by selling shares to investors and uses the accumulated funds to buy a portfolio of many different securities 

Net asset value per share – the value of mutual funds securities and cash holdings minus any liabilities, divided by the number of shares of the fund outstanding  

Exchange traded fund (ETF) - shares trades on securities markets that represent the legal right of ownership over part of a basket of individual stock certificates  

Primary securities market – the market where newly issued securities are traded. The primary market is where the firms that issues securities raise additional financial capital  

Secondary securities market – the  market where previously issued securities are traded  

Public offering – a primary market issue in which new securities are traded  

Private placement – a primary market issue that is negotiated between the issuing coproration and a small group of accredited investors  

Initial public offerings (IPO) - the first time a company issues a stock that may be bought by the general public  

Underwriting – an arrangement under which an investment banker agrees to purchase all shares of a public offering at an agreed upon price  

Registration statement – a long, complex document that firms must file with the SEC when they sell securities through a public offering  

Accredited investor – an organization or individual investor who meets certain criteria established the SEC and so qualifies to invest in unregistered securities  

Stock (or securities) exchange – an organized venue for trading stocks and other securities that meets its listing requirements  

Market makers – securities dealers that make a commitment to continuously offer to buy and sell the stock of a specific corporation listed on the NASDAQ exchange or traded in the OTC market  

Over-the counter market – the market where securities that are not listed on exchange are traded 

Electronic communication – an automated, computerized securities trading system that automatically matches buyers and sellers, executing trades quickly and allowing trades when securities exchanges are closed  

Market odor – an order telling a broker to buy or sell a specific security at the best currently available price  

Limit order – an order to a broker to buy a specific stock only if its price is below a certain level, or to sell a specific stock only if its price is above a certain level  

Stock index – a statistic that tracks how the prices of a specific set of stocks have changed  

Dow jones industrial average (DJIA) - an index that tracks the prices of 30 large, well-known US corporations 

Standard and Poor’s 500 – a stock index based on prices of 500 majors US corporations in a variety of industries and market sectors