Economics Flashcards
Capital Financing
it is more than just money
capital
refers to methods you use to raise money in launching your business.
Capital financing
types of capital
financial
human
natural capital.
are those supplied and used by the owners of an enterprise in the expectation that a profit will be earned.
Equity capital or ownership funds
are those supplied by others on which a fixed rate of interest must be paid and the debt must be repaid at a specific time.
Borrowed funds or capital
Types of Business Organizations
Individual Ownership
The Partnership
The Corporation
is the simplest form of business organization, wherein a person uses his or her own capital to establish a business and is the sole owner.
individual ownership or sole proprietorship
Advantages of the Individual Ownership
- It is easy to organize.
- The owner has full control of the enterprise.
- The owner is entitled to whatever benefits and profits that accrue from the business.
- It is easy to dissolve.
Disadvantages of the Individual Ownership
- The amount of equity capital which can be accumulated is limited.
- The organization ceases upon the death of the owner.
- It is difficult to obtain borrowed capital, owing to the uncertainty
- The liability of the owner for his debts is unlimited.
is an association of two or more persons for the purpose of engaging in a business for profit.
partnership
Advantages of the Partnership
- More capital may be obtained by the partners pooling their resources together.
- It is bound by few legal requirements as to its accounts, procedures, tax forms and other items of operation.
- Dissolution of the partnership may take place at any time by more agreement of partners.
- It provides an easy method whereby two or more persons of differing talents may enter into business, each carrying those burdens that he can best handle.
Disadvantages of the Partnership
- The amount of capital that can be accumulated is definitely
limited. - The life of the partnership is determined by the life of the
individual partners. When any partner dies, the partnership
automatically ends. - There may be serious disagreement among the individual
partners. - Each partners is liable for the debts of the partnership.
is a distinct legal entity, separate from the individuals who own it, and which can engage in almost any type of business transaction in which a real person could occupy himself or herself.
corporation
Advantages of the Corporation
- It enjoys perpetual life without regard to any change in the person of its owners, the stockholders.
- The stockholders of the corporation are not liable for the debts of the corporation.
- It is relatively easier to obtain large amount of money for expansion, due to its perpetual life.
- The ownership in the corporation is readily transferred.
- Authority is easily delegated by the hiring of managers.
Disadvantages of the Corporation
- The activities of a corporation are limited to those stated in its charter.
- It is relatively complicated in formation and administration.
- There is a greater degree of governmental control as compared to other types of business organizations.
is acquired through the sale of stock.
capital of a corporation
two principal types of capital stock:
common stock
preferred stock
represents ordinary ownership without special guarantees of return.
Common stock
have certain legal rights,
Common stockholders
Common stockholders have certain legal rights, among which are the following:
- Vote at stockholder’s meeting.
- Elect directors and delegates to them power to conduct the affairs of the business.
- Sell or dissolve the corporation.
- Make and amend the by laws of the corporation.
- Subject to government approval, amend, or change the charter or capital structure.
- Participate in the profits.
- Inspect the books of the corporation.
are guaranteed a define dividend on their stocks.
Preferred stock
usually have the right to vote in meetings, but not always.
Preferred
stockholders
a certificate of indebtness of a corporation usually for a period not less than ten years and guaranteed by a mortgage on certain assets of the corporation or its subsidiaries.
bond
are issued when there is need for more capital such as for expansion of the plant or the services rendered by the corporation.
bond
is the amount stated on the bond.
face or par value of a bond
the interest rate quoted on the
bond.
bond rate
Classification of Bonds
registered bonds
coupon bonds
The name of the owner of this bond is recorded on the record books of the corporation and interest payments are sent to the owner periodically without any action on his part.
registered bonds
have coupon attached to the bond for each interest payment that will come due during the life of the bond. The owner of the bond can collect the interest due by surrendering the coupon to the offices of the corporation or at specified banks.
coupon bonds
can collect the interest due by surrendering the coupon to the offices of the corporation or at specified banks.
owner of the bond
Methods of Bond Retirement
- The corporation may issue another set of bonds equal to the amount of bonds due for redemption.
- The corporation may set up a sinking fund into which periodic deposits of equal amount are made. The accumulated amount in the sinking fund is equal to the amount needed to retire the bonds at the time they are due.
one of the most important business tools. It is used to determine the level of profitability of a certain company. It provides the companies with targets to cover costs and make a profit. It helps the business determine the cost structures and the number of units that need to be sold in order to cover the cost and start making a profit.
break-even analysis
is usually done as part of a business plan to see how practical the business idea is, and whether or not it is worth pursuing.
break-even analysis
can be determined by calculating the points at which revenue received equals the total costs associated with the production of goods or services.
break-even point
is a method of determining when value of one alternative becomes equal to the value of another.
break-even analysis
It is commonly used to determine when costs exactly equal revenue.
break-even analysis
is a graphical representation of break-even analysis.
break-even chart
is the quantity of production at which the income is equal to total cost.
break-even point
The intersection of total revenue and total costs give a point
break-even point
different methods on alternative comparison.
- present worth method
- future worth method
- annual cost analysis
- rate of return
is restricted to evaluating alternatives that are mutually exclusive and that have the same lives. This method is suitable for ranking the desirability of alternatives.
present worth method
is exactly comparable to the present worth method except that all cash inflows and outflows are compounded forward to a reference point in time called the future.
future worth method
assumes that each alternative will be replaced by an identical twin at the end of its useful life (i.e., infinite renewal).
annual cost method
is the effective annual interest rate at which an investment accrues income.
rate of return
four majoy reasons for replacement
- physical impairment
- inadequacy
- obsolescence
- rental or lease possibilities
The existing asset is completely or partially worn out and will no longer function satisfactorily without extensive repairs.
physical impairment
The existing asset does not have sufficient capacity to meet the present demands that are placed on it.
inadequacy
This may be caused either by a lessening in the demand for the service rendered by the asset or the availability of more efficient assets which will operate with lower out-of-pocket costs.
obsolescence
It is possible to rent identical or comparable asset or property, thus freeing capital for other and more profitable use.
rental or lease possibilites
may be made by any of the basic procedures or patterns which have been discussed previously.
replacement economy studies
is the difference between its book value and its resale value when replaced.
unamortized value of an equipment or property
is a measure of the effectiveness of an investment of capital. It is a financial efficiency.
rate of return
is the total investment required to finance the project, whether equity or borrowed.
capital invested
In this method, interest on the original investment (sometimes called minimum required profit) is included as a cost. If the excess of the annual cash inflows over annual cash outflows is not less than zero the proposed investment is justified-is valid. This method is covered by the same limitations as the rate of return pattern a single initial investment of capital and uniform revenue and cost throughout the life of the investment.
annual worth method
is flexible and can be used for any type of economy study. It is extensively in making economy studies in the public works field, where long-lived structures are involved.
present worth method
is commonly defined as the length of time required to recover the first cost of an investment from the net cash flow produced by that investment for an interest rate of zero.
payback period
is an allowable expenses in general accounting purposes and income tax accounting purposes.
depreciation
allows for the companies to recover cost of an asset when it was purchased. It allows the companies to cover the total cost of an asset over it’s lifespan.
depreciation
the decrease in the value of a physical property with the passage of time.
depreciation
types of depreciation
physical depreciation
functional depreciation
this is due to the reduction of the physical ability of an equipment or asset to produce results.
physical depreciation
this is due to the lessening in the demand for the function which the property was designed to render.
functional depreciation
- Be used in business or held for the production of income;
- Have a definite service life, which must be longer than one year; and
- Be something that wears out, decays, gets used up, becomes obsolete, or loses value from natural causes.
properties that depreciates
Buildings
Machinery
Equipment
Vehicles
Intangible properties (copyrights and patents;
customer subscription lists; franchises)
Driveways
Parking lots
Landscaping
Automobile for business purpose
the cost of acquiring an asset, including transportation expenses and other normal costs of making the asset serviceable for its intended use.
initial investment / first cost (FC)
worth of property or an asset as shown on the accounting records of the company. It is the original cost of the property less all allowable depreciation deductions.
book value (BV)
the amount that will be paid by a willing buyer to a willing seller for a property after depreciation is computed.
salvage value (SV)
the expected period that a property will be used in trade or business to produce income.
useful life (L)
the length of time during which the property is capable of performing the function
physical life
length of time during which the property may be operated at a profit.
economic life
the number of years over which the basis of property is recovered through the accounting process.
recovery period (n)
a percentage for each year of the recovery period that utilized to compute an annual depreciation deduction.
recovery rate (i)
The simplest depreciation method. this method assumes that the loss in the value is directly proportional to the age of the equipment or asset.
straight line method (SLM)
This method assumes that a sinking fund is established in which funds will accumulate for replacement. The total depreciation that has taken place up to any given times is assumed to be equal to the accumulated amount in the sinking fund at that time.
siking fund method (SFM)
it is assumed that the annual cost of depreciation is a fixed percentage of the salvage value at the beginning of the year.
declining balance method
it is sometimes called the constant percentage method or _________
matheson formula
It is a method of evaluating depreciation where the depreciation changes from year to year.
sum of the year digit method
This method is very similar to the DBM except that the rate of depreciation k is replaced by 2/L
double declining balance method (DDBM)
This method assumes that the total depreciation that has taken place is directly proportional to the quantity of output of the property up to that time. This method has the advantage of making the unit cost of depreciation constant and giving low depreciation expense during periods of low production.
service-ouput method
