BUS 101 Test 3 Study Guide Flashcards
Greater Financial Success
Independence
Flexibility
Challenge
Survival
Reasons to launch a small business
People who risk their time, money, and other resources to start and manage a business
Entrepreneurs
Entrepreneurs aim to change the world through goods and services
Hope to better themselves but most do not expect huge, transformative growth
The Entrepreneurial Mindset
Vison
Self-reliance
Energy
Confidence
Tolerance of uncertainty
Tolerance of Failure
Entrepreneurial Characteristics
Friends, family, and personal credit cards
Personal resources
Sources include commercial banks, U.S Small Business Administration (SBA), and peer-to-peer lending
Loans
Process of funding ventures by raising money from a large number of investors via the internet
Crowdfunding
Individuals who invest in start-up companies with high growth potential in exchange for a share of ownership
Angel Investors
Companies that invest in start-up businesses with high growth potential in exchange for a share of ownership
Venture Capital Firms
Market niches
Personal customer service
Lower overhead costs
Technology
Opportunities
High risk of failure
Lack of knowledge and experience
Less money and more regulatory burden
High health insurance costs
Threats
High risk of failure
Lack of knowledge and experience
Less money and more regulatory burden
High health insurance costs
Threats
An agency of the federal government designed to maintain and strengthen the nation’s economy by aiding, counselling, assisting, and protecting the interests of small businesses
Small Business Administration (SBA)
A formal document that describes a business concept, outlines core business objectives, and details strategies and timelines for achieving those objectives
Business Plan
Rates are higher for “necessity entrepreneurship”—where people have few options
Per capita income
Lower in countries that provide a high level of employment protection
Opportunity Costs
Complex regulations or lack of cultural support contribute to low rates
Cultural/political environment
A system for recognizing, organizing, analysing, and reporting information about the financial transactions that affect an organization
Accounting
To provide users with relevant, timely information that can help them make better economic decisions
Accounting’s goal
Provides services such as tax preparation, external auditing, and management consulting to clients on a fee basis
Public accountants
Work within a company and provide analysis, prepare reports and financial statements, and assist managers
Management accountants
Perform accounting functions for local, state, or federal government agencies
Government accountants
The branch of accounting that prepares financial statements for use by owners, creditors, suppliers, and other external stakeholders
Financial accounting
A set of accounting standards that is used in the preparation of financial statements
Generally accepted accounting principles (GAAP)
The private board that establishes the generally accepted accounting principles used in the practice of financial accounting
Financial Accounting Standards Board (FASB)
Balance sheet
Income statement
Statement of cash flows
Basic financial statements
A financial statement that reports the financial position of a firm by identifying and reporting the value of the firm’s assets, liabilities, and owners’ equity
Balance sheet
Assets = Liabilities + Owners’ Equity
Accounting equation
Resources owned by a firm
Assets
Claims that outsiders have against a firm’s assets
Owners’ equit
The financial statement that reports the revenues, expenses, and net income that resulted from a firm’s operations over an accounting period
Income statement
Increases in a firm’s assets that result from the sale of goods, provision of services, or other activities intended to earn income
Revenue
Resources that are used up as the result of business operations
Expenses
The difference between the revenue a firm earns and the expenses it incurs in a given time period
Net income
The financial statement that identifies a firm’s sources and uses of cash in a given accounting period
Statement of cash flows
Show the amount of cash that flowed into the company from the sale of good and services, as well as cash from dividends and interest received from ownership of the financial securities of other firms
Cash flows from operating activities
Show the amount of cash received from the sale of fixed assets (such as land and buildings) and financial assets bought as long-term investments to grow or improve the business
Cash flows from investing activities
Show the cash the firm received from issuing additional shares of its own stock or from taking out short-term and long-term loans
Cash flows from financing activities
Shows how retained earnings have changed from one accounting period to the next
Statement of retained earnings
Shows how net income and dividends affect retained earnings
Shows changes in stockholders’ equity, such as changes that arise from the issuance of additional shares of stock
Stockholders’ equity statement
Prepared after conducting an annual external audit of the financial statements
Included in the annual report that a firm sends its stockholders
Independent Auditor’s Report
Analysis of financial statements that compares account values reported on these statements through two or more years to identify changes and trends
Horizontal analysis
A management tool that explicitly shows how a firm will acquire and use the resources needed to achieve its goals over a specific time period
Budgeting
Helps managers specify how they intend to achieve goals set during the planning process
Encourages communication and coordination among managers and employees
Serves as a motivational tool
Helps managers evaluate progress and performance
Advantages of budgeting
The branch of accounting that provides reports analysis to managers to help them make informed business decisions
Managerial (or management) accounting
The funds a firm uses to acquire its assets and finance its operations
Financial capital
The functional area of business that is concerned with finding the best sources and uses of financial capital
Finance
Maximise the value of the firm to its owners
Goal of financial management
The degree of uncertainty regarding the outcome of a decision
Risk
The observation that financial opportunities that offer high rates of return are generally riskier than opportunities that offer lower rates of return
Risk-return trade-off
Computing ratios that compare values of key accounts listed on a firm’s financial statements
Financial ratio analysis
The use of debt in a firm’s capital structure
Financial leverage
Measures ability to pay short-term liabilities as they come due
Liquidity (Current)
Measures how effectively a firm is using its assets to generate revenue
Asset management (Inventory turnover/Average collection period)
Measures the extent to which a firm relies on debt to meet its financing needs
Leverage (Debt-to-assets)
Compares the amount of profit to some measure of resources invested
Profitability (Return on equity/Earnings per share)
Provided by owners
Equity financing
Provided by creditors and lenders
Debt financing
The degree to which a firm depends on one versus the other
Capital structure
Interest payments are a tax-deductible expense
Firms can acquire additional funds without requiring existing stockholders to invest more of their own money or the sale of stock to new investors
Pros of Debt Financing
Requirement to make fixed payments
Creditors often impose covenants on the borrower
Cons of Debt Financing
More flexible and less risky than debt financing
Imposes no required payments
Pros of Equity Financing
Does not yield the same tax benefits as debt financing
Existing owners might not want a firm to issue more stock as it may dilute their share of ownership
Company that relies mainly on equity financing forgoes the opportunity to use financial leverage
Cons of Equity Financing
The process a firm uses to evaluate long-term investment proposals
Capital bugeting
The principle that a dollar received today is worth more than a dollar received in the future
Time value of money
