Foundation of ENTR midterm Flashcards
Value is the
Relationship between the price of a good or service and the benefits that it offers it’s customers
In the context of the competitive environment dimension of a business, a product has value when its benefits to the customer are _____ than the price the customer pays
Lesser
One of the factors of production that includes machines, tools, buildings, information, and technology
Capital
In the context of your career choice, will the broader economy influence the level of your personal financial success
Yes
When companies introduce innovative products and services worldwide, it ______ the standard of living for populations
Increases
Does the balance of trade play a central role in determining the balance of payments
Yes
Do China and India represent a smaller opportunity in terms of size and economic growth despite their huge populations
No
Are quotas Taxes levied against imports
No
Do socially responsible employers stick to state laws and don’t go beyond them when it comes to providing a good working environment to employees
No
Is consumerism a social movement focused on the consumption of highly viable expensive items that improve a persons individual image among their peers
No
What has made ethics and social responsibility complicated for workers at every level
Globalization
What means weaving environmentalism throughout the business decision making process
Sustainable development
What was a drawback of communism
Inability of people to make basic choices such as where to work or what to buy
What places paramount importance on the need for government to intervene in the economy to ensure a fair and equitable distribution of income
Capitalism
What measure the total value of all imports and exports of a nation on a quarterly basis
GDP
In what communication does the tone of voice and body language mean more to the listener than the verbal content of the message
Face to face
What happens when one transmits relevant meaning to ones audience
Effective communication
As _____ gains speed, intercultural communication will become less important to business success
Globalization
Should a business email have a compelling subject line
Yes
What occurs when 2 i dependent businesses combine to form a new organization
Merger
Is a corporation a voluntary agreement under which 2 people acts as co owners of a business for profit?
No
What can be used by companies to move into foreign markets
Franchising
Is there a limit on the number of partners who can participate in a general partnership
No
Which control is a deep seated sense that the individual is personally responsible for what happens in his or her life
Internal locus of control
The global entrepreneurship monitor (GEM) shows that people living in high willing countries tend to be ______ willing time start their own businesses than people living in low income countries
Less
Do entrepreneurs feel a correlation between dollars earned and hours worked
Yes
Someone decides to check with their accountant to see how much money they owe to a supplier. Should they ask for the balance sheet
Yes
If asked to prepare a customized report of cost overruns at a facility, what type of accountant are you
Managerial
Would statement would be helpful for a bank determining if a business is going to be capable of paying back a loan
Statement of cash flows
What is the current ratio
current assets/ current liabilities
What normally covers a one year period and shows projected cash inflows and outflows for each month
Cash budget
Successful firms embrace
Change and are Actively looking for ways to expand their business
Value:
Relationship between the price of a good or a service and the benefits it offers. Thing I’m getting is worth more than the money I’m giving up
Business:
Organization or activity that provides goods and services in an effort to earn a profit
Profit
Revenue- Expenses
Loss:
When Expenses > Revenue
Entrepreneurs:
People who risk their time, money, and other resources to start and manage a business
Standard of living:
Quality and quantity of goods and services available to a population
Quality of life:
Overall sense of well-being
Nonprofits
Business-like establishments that employ people and produce goods and services
Aim to contribute to the community rather than generating financial gain
Goal- Contribute to community vs make financial gain for owner
Registered B Corporations
See how you score
a rigorous assessment of impact on workers, customers, community, and environment
Factors of production:
Fundamental resources required to achieve organizational objectives
What are the Factors of production:
Natural resources
Capital
Human resources
Entrepreneurship
Business Environment
Setting in which business operates
Makes critical difference in whether an economy thrives or disintegrates
Speed-to-market:
Rate at which a firm transforms concepts into actual products
Bleeding-edge firms
Launch products that are too far ahead of the market
Leading-edge firms
Offer products as the market becomes ready to embrace them
Workforce Advantage
A key resource for firm’s competitive advantage
World Wide Web:
Allows computer users to easily access and share information on the Internet
e-commerce:
Business transactions conducted online, typically via the Internet
Demographics
Measurable characteristics of a population
Population size and density, age, gender, race, education, and income
Social Envrironment
Diversity, aging population, rising worker expectations, ethics and social responsibility
Free trade:
International political economic movement designed to help goods and services flow more freely across international boundaries
General agreements on tariffs and trades (GATT):
International trade agreement that lowers tariffs and promotes free trade worldwide
Lowered prices and increased quality across product categories
Global environment issues that affect economies
War and Terrorism
Disease
Natural Disasters
Economy
Financial and social system of how resources flow through society
system through which resources flow, what do they value and use resources for, goals and outcomes
Economics
Study of the choices made by people, companies, and governments to allocate society’s resources
determining how and why resources being used study
Macroeconomics:
Study of a country’s overall economic dynamics
Microeconomics:
Study of smaller economic units
Global Economic Crisis
Began when the dot-com bubble burst in 2000, followed by the 9/11 terrorist attacks in 2001
Stock market dropped
Unemployment rate increased
Economy was on the brink of recession
Subprime mortgage loans
Granted to borrowers with low credit scores
Provided lenders higher return than many other investments
Balloon mortgage-
talk about monthly payment vs terms, for the 1st X years. But steep staggered payments increasing
But when they had to refinance when they all did at once bc of bubble burst. Banks lost so much money.
Business that were doing well couldn’t get a loan, starting out couldn’t get a loan, people who usually could couldn’t get a loan
Troubled Assets Relief Program (TARP)
Introduced as an economic bailout plan
Successful businesses couldn’t get loans
Money put in economy so big companies could get load, they would have to pay it back
Tax payer money used to help big companies
No bailout for small successful companies
Government passed the ______ to help the nation recover from a financial disaster
Included cutting taxes, building infrastructure, and investing in green energy
American Recovery and Reinvestment Act
Government efforts to influence the economy through taxation and spending
Fiscal Policy
How much have we decided we are going to borrow
Maximum amount Congress lets the government borrow
Debt ceiling:
Across-the-board spending cuts and sharp tax hikes to decrease the U.S budget deficit
Fiscal cliff -
Overage that occurs when revenue is higher than expenses over a given period of time
Budget surplus
Shortfall that occurs when expenses are higher than revenue over a given period of time
Budget deficit
Sum of all the money that the federal government has borrowed over the years and not yet repaid
Federal debt
Federal Reserve decisions that shape the economy by influencing interest rates and the supply of money
Take money out of supply, raise interest rates to banks
Govt can buy and sell securities
Need to regulate to balance recession and inflation
Taking money in and out of circulation
Monetary Policy
Purpose - To influence the size of the money supply
Influencing how much free spending money you will have to spend
Federal Reserve
Includes all currency plus checking accounts and traveler’s checks
M1 money supply:
Includes all M1 money supply plus most saving accounts, money market accounts, and certificates of deposit
M2 money supply:
Federal Reserve function of buying and selling government securities
Open market operations
Rate of interest that the Federal Reserve charges when it loans funds to banks
Discount rate
Rule set by the Federal Reserve, which specifies the minimum amount of reserves a bank is required to hold
Reserve requirement
Fundamental Rights of Capitalism
Right to own a business and keep after-tax profits
Right to private property
Right to free choice
Right to fair competition
Many competitors selling virtually identical products
Agriculture
Virtually same products
Pure Competition
Many competitors selling differentiated products
Lots of different ppl selling products
T-shirt sellers
Monopolistic:
Handful of competitors selling products that can be similar or different
Small # of competitors
High barriers to entry
Oligopoly:
Single producer dominating the industry, leaving no room for competitors
Monopoly:
arises when a single supplier is more efficient than multiple, competing ones
Natural monopoly
Government owns and operates key enterprises that directly affect public welfare
Socialism:
Public ownership of all enterprises
Under the direction of a strong central government
Communism:
Embody elements of planned and market-based economic systems
Help in meeting the needs of the citizens
Mixed Economies
Process of converting government-owned businesses to private ownership
Charter schools
Prisons
Privatization:
Total value of all final goods and services produced within a nation’s physical boundaries over a given period of time
Vital measure of economic health
How is the economy doing
How is it growing
Measurement tool
Gross domestic product (GDP)
Percentage of people in the labor force over age 16 who do not have jobs and are seeking employment
Unemployment rate:
When it is possible to find better jobs
Frictional unemployment -
Unemployment for a longer term as skills are no longer relevant
Structural unemployment -
- Layoffs during recessions
Cyclical unemployment
Job loss related to the time of year
Seasonal unemployment -
Periodic contraction and expansion of the economy
Business Cycle
Period of economic downturn
Contraction:
Marked by a decrease in the GDP for two consecutive quarters
Recession:
: Long-lasting recession
Depression:
Period of rising economic growth and employment
Recovery
Period of strong economic growth and high employment
Expansion:
Measure used to evaluate economic well-being
Price Levels
Period of rising average prices across the economy
Inflation:
Average monthly inflation rate of more than 50 percent
Hyperinflation:
Period of slowing average price increases
Disinflation
Period of falling average prices
Deflation:
Evaluates the change in the weighted-average price of goods and services that an average consumer buys each month
Average price of things ppl buy in average month
Is it higher or lower
Price indexes to evaluate inflation
!! Consumer price index (CPI):
Evaluates the change over time in the weighted-average wholesale prices
Producer price index (PPI):
Relationship between the production of goods and services and the resources required to produce them
Productivity:
es economies stronger, higher stanndards of living
Trade
Reduces barriers to trade with new tech
BRIC countries - Brazil, Russia, India, and China
Migration of labor-intensive, low-wage manufacturing jobs away from China has benefited their economic growth
Vietnam, the Philippines, and Bangladesh
Migration of labor-intensive, low-wage manufacturing jobs away from China make them beneficiaries of economic growth
Emergine Economies, low wage jobs
3 Reasons for International Trade
Access to factors of production
- International trade helps even out some of the resource imbalances among nations
Reduced Risk
- Global trade reduces dependence on one economy, lowering the risk for multinational firms
Inflow of innovation
-International trade is a source of new ideas for companies
Opportunity of giving up the second-best choice when making a decision
what u give up
Opportunity cost:
When a country produces more of a product than other nations using the same amount of resources
Absolute advantage:
When a country makes products at a lower opportunity cost than other countries
Comparative advantage:
Overage that occurs when the total value of a nation’s exports is higher than the total value of its imports
Trade surplus
Shortfall that occurs when the total value of a nation’s imports is higher than the total value of its exports
Trade deficit
Basic measure of the difference in value between a nation’s exports and imports
Balance of Trade
Measure of the total flow of money into or out of a country
Balance of Payment
: Overage that occurs when more money flows into a nation than out of it
Balance of payment surplus:
Shortfall that occurs when more money flows out of a nation than into it
Balance of payment deficit:
Measurement of the value of one nation’s currency relative to the other nation’s currency
Exchange rates
International trade that involves barter of products for products rather than for currency
Countertrade
Contracting with foreign suppliers to produce products
Foreign outsourcing
Buying products domestically that have been produced or grown in foreign nations
Importing
Selling products in foreign nations that have been produced or grown domestically
Exporting
Authority granted by a domestic firm to a foreign firm for:
The rights to produce and market its product
Using its trademark/patent rights in a defined geographical area
Grant a company in another country to produce and market their product and they pay portion of sales
Foreign licensing:
Firm provides the rights to produce and market its products to franchisees in other countries
Applicable only if the franchisee agrees to specific operating requirements
more restrictions
Foreign franchising:
When firms acquire foreign firms or develop new facilities from ground up in foreign countries
Direct investment
When two or more companies join forces to pursue specific opportunities
Joint ventures
Voluntary agreement in which two or more people act as co-owners of a business for profit
Not creating a new entity, just working together
Partnership
Agreement between two or more firms to jointly pursue a specific opportunity without actually merging their businesses
2 or more firms work together in pieces
Strategic alliance
3 Barriers to International Trade
Socio Cultural differences
Economic Differences
Political and Legal Differences
Differences among countries in language, attitudes, and values
Sociocultural differences
Less-developed markets require innovation and efficiency
Economic differences
Country’s physical facilities that support economic activity
Infrastructure:
Laws and regulations - International businesses need to comply with:
International legal standards
Laws of their own countries
Laws of their host countries
Influences whether a nation is attractive to foreign business
Political climate
National policies designed to restrict international trade
Protectionism:
Taxes levied against imports
Tariffs:
Limitations on the amount of specific products that may be imported from certain countries during a given time period
Quotas
Limitations on the amount of specific products that one nation will export to another nation
Voluntary export restrains (VERs):
Complete ban on international trade of a certain item, or a total halt in trade with a particular nation
Embargo:
Unrestricted movement of goods and services across international borders
International trade treaty that is designed to encourage worldwide trade among its members
Free Trade
Permanent global institution that promotes international trade and settles international trade disputes
World Trade Organization (WTO)
International cooperative of 188 member countries, working together to reduce poverty in the developing world
World Bank
Organization of 188 member nations that promotes international economic cooperation and stable growth
International Monetary Fund (IMF
ah
Trading bloc
Countries that have eliminated tariffs and harmonized trading rules to facilitate the free flow of goods among member nations
Common Markets
Treaty among the United States, Mexico, and Canada
Eliminated trade barriers and investment restrictions
North American Free Trade Agreement (NAFTA):
World’s largest common market composed of 28 European nations
European Union (EU):
Set of beliefs about:
Right and wrong
Good and bad
Ethics
Ethical norms that apply to people across a broad spectrum of situations
widely accepted across countries and times (Don’t kill innocent ppl)
Universal ethical standards:
Application of right and wrong, good and bad, in a business setting
Different societies have different beliefs
If follow rules, you can still fail here
Business ethics:
Decisions that involve a conflict of values
Not clear cut
Ethical Dilemmas
Are Universal Ethical Standards universal?
Depends on how we define the object of these beliefs, unless is always there
Ethics and the individual
Influenced by personal needs, family, culture, religion, and personality traits
Business leaders who scored high on personal empathy exhibited high levels of ethical leadership
Influenced by culture
Standards of right and wrong
Individuals bring their effects to work
Ethics and the organization
Organizations influence the ethical conduct of employees
Can change quickly with a change of leadership – Both for the positive and the negative
The organization can affect the ethical behavior of employees
You want to influence them
Elements of a strong culture
Comprise ethics-related actions at all levels of an organization and accountability for those actions
Make sure behavior is enforced at all levels of org and equally accountable
Establishing an ethical culture
Involves backing up ethical words with documented practices, processes, and procedures
Create a culture so we know what the standards
Broad documents to support coworkers
Formal written document that defines the ethical standards of an organization
Gives employees the information required to make ethical decisions across a range of situations
Code of Ethics
Steps for Implementation of Code of Ethics
- Get executive buy-in and commitment to follow through
- Establish expectations for ethical behavior at all levels of the organization
- Integrate ethics into mandatory staff training
- Ensure that the ethics code is global and local in scope
- Build and maintain a clear, trusted reporting structure for ethical concerns and violations
- Establish protection for whistle-blowers
- Enforce the code of ethics
Participative activity, need to believe it,
Say what it means at every level of the organizations
Need to train everyone, praise those that follow it
Code affect international trade, still applies. Make sure to help everywhere
Build a reporting structure to stay anonymous
Protection for those who report
Employees who report their employer’s illegal or unethical behavior to either the authorities or the media
Whistle-blowers
3 spectrums of Social Responsibility
Proactive
Make the world a better place, plan
Responsive
When an opportunity arises, participate casually
None
For profit does the bare minimum
Groups that have a stake in the performance and actions of an organization
Who does our business matter to
What do I feel like I owe…
Stakeholders
Organization has a responsibility toward:
Employees - Creating jobs that work (for whom?)
Customers - Delivering value by providing quality products at fair prices (what’s fair?)
Investors - Meeting legal requirements
Community - Contributing to society
Deliberately designing products to fail in order to shorten the time between consumer purchases
Know that after a period, things will need to be replaced to make more money
Planned obsolescence:
Sets higher ethical standards for public corporations and accounting firms
Need higher standards for legal things
Sarbanes-Oxley Act:
Business donations to nonprofit groups
Corporate philanthropy:
Marketing partnerships between businesses and nonprofit organizations
Cause-related marketing:
Business contributions to the community through the actions of the business itself rather than donations of money and time
Corporate responsibility:
Doing business to meet the needs of the current generation, without harming the ability of future generations to meet their needs
Sustainable development
Developing and promoting environmentally sound products and practices to gain a competitive edge
Green Marketing
Challenging issues faced by companies and individuals
Bribery & Corruption
Evaluation of how well a firm is meeting its ethics and social responsibility goals
Social audit:
Obstacles to effective communication
Communication barriers
Interference that causes misinterpretation of information
Noise
6 Types of Communication Barriers
1. Physical It’s too loud 2. Language Speak different langueages Slang 3. Body language note language, tone 4. Perceptual gender, prejudiced 5. Organizational Status 6. Cultural Assumptions or norms
Communication that does not use words
Nonverbal Communication
Attentive listening that occurs when a listener focuses his or her complete attention on the speaker
Active listening
Various ways in which a message is sent
The method of sending info
Communication Channels
Methods for Effective Communication
Analyzing the audience
Being concise
Avoiding slang and bias
Bias: Preconception about members of a particular group
Subject performs the action expressed by the verb
The Noun does the action
Active voice:
Subject does not do the action expressed by the verb; rather, the subject is acted upon
not as effective, the taxes were done by the accountent
Passive voice:
Striking the right tone with the appropriate conversational style Avoiding grammatical errors Using block paragraphs Using headings and bullets appropriately Striking the right tone with the appropriate conversational style Avoiding grammatical errors Using block paragraphs Using headings and bullets appropriately
Writing Effectively
Creating and Delivering Verbal Presentation
Tell em what u gon tell em
Tell em
Tell em what u told em
Single owner who manages the company
Sole proprietorship:
Voluntary agreement between two or more co-owners of a business for profit
Work with more than one person
People are the business
Partnership:
All partners take an active role in managing the business and have unlimited liability for claims against the firm
All working equally together
General partnership:
Business is considered a legal entity that is separate and distinct from its owners
legal entity separate from owners
Sueing goes to business
Corporation:
Establishes the existence of a new corporation
Articles of incorporation:
can’t take away personal things
limited liability
Offers limited liability to owners and flexible tax treatment
Has legal standing, it’s like it’s own person
Corp pays taxes
out double taxation
Limited liability company (LLC):
Advantages and Disadvantages of Sole Proprietorship
pros
You determine everything
Retain profits
No corp taxes
cons
Raising money is harder
Can take from businesses
Heavy workflow
Advantages and Disadvantages of Partnerships
Pros
More money options
Multiple skills
No double taxation
Cons Person who is suing can choose those with the most assets Arguments how ae decisions going to be made hard to leave
Includes at least one general partner who actively manages the company and accepts unlimited liability
1 partner and accepts risk of limited libility
Give up some control
Limited partnership:
All partners have the right to participate in the management and have limited liability for company debts
All partners participate
LLP:
Offers limited liability to all its stockholders
Requires filing articles of incorporation, paying filing fees, and adopting of corporate bylaws
Can’t go sue owners
easier to accept funding
Need board of directors
C Corporation
Organization that pools contributions from investors, clients, or depositors and uses these funds to buy stocks and securities
Institutional investors:
Elected by stockholders to represent their interests
Board of Directors
Advantages and Disadvantages of C Corporations
Advantages Limited liability Permanence Ease of transfer of ownership Ability to raise financial capital Ability to make use of specialized management
Cons
Expensive and complicated
When in multiple states, options differ from state to state
Stocks & Corp pay taxes
Everyone needs to be able to see what you make
More paperwork than C Corp
NO double taxation
Indiueal taxws
S Corp-
not all states, smaoll stock holders
Owners participate in mananagmenet
Closed corps
Exempt from taxes but have to be used for the cause
Still pay staff
audited heavily
Can’t make donations
Nonprofits
One firm buys another firm
Acquisition:
Two formerly independent business entities combine to form a new organization
Merger: `
Transfer of total or partial ownership of some of a firm’s operations to investors or to another company
Divestiture:
Created by filing a document and paying filing fees in the state where the business is organized
Organizers draft an operating agreement
Need to make a list on how u handle arguments
Formal filing documents
Forming and Managing an LLC
Advantages and Disadvantages of Limited Liability Companies (LLCs)
No double tax hit
Simpler than corp but harder than single owner
Hard to get set up
Licensing arrangement under which a franchisor allows franchisees to use its name, trademark, products, and business methods
Arrangement is in exchange for monetary payments (royalties)
Franchise
Franchisor makes a product and licenses the franchisees to sell it
Distributorship:
FranchiseExpansion into foreign markets is ____ because competition is less intense and less saturated
greater
Advantages and Disadvantages of Franchising
More popular bc ppl know it
Costa a lot
Someone else owns it
If one owner does bad things, bad for the brand
Contractual arrangement between a franchisor and franchisee
Spells out the duties and responsibilities of both parties
Franchise Agreement
Description of all aspects of a franchise that the franchisor must provide to the franchisee
Franchise Disclosure Document (FDD)
6 Terms Included under Franchise Agreements
- Terms & Conditions
- Fees & Other Payments
- Training & Support
- Specific Operational Requirements
- Conflict Resolution
- Assigned Territory
6 Reasons ppl launch small businesses
Financial Success Independence Flexibility Challenge Survival Call to action
Attitude to change the world through goods or services
Entrepreneurial mindset
Vision and self-reliance
Energy and confidence
Tolerance of uncertainty and failure
Characteristics of Entrepreneurial Mindset
Deep-seated sense that an individual is personally responsible for what happens in his or her life
Internal locus of control
Feeling buffeted by forces such as random luck and the actions of others
External locus of control
Funding Options for Small Businesses
Personal Resources Loans Crowdfunding Angle Investors Venture Capital firms
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
Small Business Opportunities and Threats
Opportunities: Market niches Personal customer service Lower overhead costs Technology
Threats: High risk of failure Lack of knowledge and experience Less money and more regulatory burden High health insurance costs
Agency of the federal government designed to maintain and strengthen the nation’s economy
Aiding, counseling, assisting, and protecting the interests of small businesses
Small Business Administration (SBA)
3 Tools for Business Success
Gaining experience
Learning from others and educating oneself
Accessing SBA resources
Local offices that provide comprehensive management assistance to current and prospective small business owners
Small Business Development Centers (SBDCs)
Organization that provides free, comprehensive business counseling for small business owners from qualified volunteers
SCORE (Service Corps of Retired Executives)
Developing a business plan
Business plan:
Formal document that:
Describes a business concept
Outlines core business objectives
Details strategies and timelines for achieving objectives
How Small Businesses Contribute to the U.S. economy
Create new jobs
Fuel innovation
Vitalize inner cities
ENTR is around the world
High in lower-income countries as they aim to increase the per capita income (Micro Businesses in the developing world…Honduras example)
Low in countries that provide a high level of employment
High in countries with limited regulation and strong governmental support
System for recognizing, organizing, analyzing, and reporting information about the financial transactions that affect an organization
Allows users to recognize patterns, organize, analyze, report
Accounting
Users of Accounting Information
Managers Stockholders Employees Creditors Suppliers Govt agencies
Provide services such as tax preparation, external auditing, or 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
Branch of accounting that prepares financial statements for use by owners, creditors, suppliers, and other external stakeholders
Financial Accounting
Set of accounting standards used in the preparation of financial statements
Generally accepted accounting principles (GAAP):
Private board that establishes the generally accepted accounting principles used in the practice of financial accounting ensure that financial statements are: Relevant Reliable Consistent Comparable
Financial Accounting Standards Board (FASB)
Financial statement that reports the financial position of a firm by identifying and reporting the value of its:
Assets, liabilities, owners equity
Balance Sheet
Resources owned by a firm
Assets
Claims that outsiders have against a firm’s assets
Liabilities:
Claims that a firm’s owners have against their company’s assets
Owner’s equity:
Accounting Equation
Assets = Liabilities + Owner’s Equity
Reports the revenues, expenses, and net income that resulted from a firm’s operations over an accounting period
Income Statement (P&L)
Increases in a firm’s assets that result from activities intended to earn income
Revenue
Resources that are used up as a result of business operations
Expenses
Difference between revenue and expenses in a given period of time
Net income:
Income Statement formula
Revenue – Expenses = Net Income
(profit/loss)
Identifies the amount of cash that flowed into and out of a firm from the following types of activities (in a given accounting period):
Pinpoint if the firm is bringing in cash from it’s primary business/operations (selling its goods/services) or from a lucrative investment or one-time sale of land, equipment, etc.
Is this sustainable?
Statement of Cash Flows
- Sale of goods or services
Cash flows from operating activities
Sale of fixed assets and financial assets bought as long-term investments
Cash flows from investing activities
Issuing additional shares of a firm’s own stock or from taking out short-term and long-term loans
Cash flows from financing activities
Simple statement that 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
Methods Used by Stakeholders to Understand Company’s Financial Statements
Getting an independent CPA firm to perform an annual external audit of the financial statements
Checking notes to financial statements
Looking for trends in comparative statements
: Financial statement that compares account values reported on the financial statements over two or more years to identify changes and trends
Horizontal analysis
Prepared after conducting the annual external audit of the financial statements
Verifying to see if the financial statements were properly prepared in accordance with the generally accepted accounting principles
Independent Auditor’s Report
Management tool that explicitly shows how a firm will acquire and allocate the resources needed
To achieve its goals over a specific time period
Budgeting
Budgeting Facilitates planning by requiring managers to:
Translate goals into measurable quantities
Identify the specific resources needed to achieve these goals
Communicate an organization’s sales and production goals and the resources needed to achieve them
Operating budgets
Focus on a firm’s financial goals and identify the resources needed to achieve them
Financial budgets
Represent a firm’s overall plan of action for a specified time period
Master budgets
Top management prepares the budget with little or no input from middle and supervisory managers
Top-down budgeting
Middle and supervisory managers are allowed to participate actively in the creation of the budget
Bottom-up (or participatory) budgeting
Created based on the assumption that there is a single level of sales
Real-world sales vary considerably from the forecasted value and the figures become inaccurate
Static Budget
Developed over a range of possible sales levels and appropriate budgeted level of costs
Flexible Budget
Involve payment of money or other resources
Out-of-pocket Costs
Arise when a firm uses owner-supplied resources
Implicit Costs
Remain the same when the level of production changes within some relevant range
Fixed Costs
Vary directly with the level of production
Variable Costs
Incurred directly as a result of some specific cost object
Direct Costs
Result of a firm’s general operations and are not directly tied to any specific cost object
Indirect Costs
Technique to assign product costs based on links between activities that drive costs and the production of specific products
Activity-based costing (ABC):
Funds that a firm uses to acquire assets and finance its operations
Stuff that financing their operations Core business concept Rev not from operations is not dependable Acquired from Owners Use earnings to buy stuff for business Loans Credit Stocks All reinvest into business
Financial Capital
Functional area of business that is concerned with:
Finding the best sources
Uses of financial capital
Finance
Goal of financial management is to
maximize the value of the firm to its owners
Degree of uncertainty regarding the outcome of a decision
Risk
Observation that financial opportunities that offer high rates of return are riskier than those offering lower rates of return
Risk-return tradeoff
Computing ratios that compare values of key accounts listed on financial statements
Financial Ratio Analysis
Measures the ability of a firm to obtain the cash it needs to pay its short-term debt
how quickly can you turn things into cash to pay short term debt
Liquidity ratios:
Asset that can quickly be converted into cash with little risk of loss
need little to no risk
Liquid asset:
Measures the effectivity of a firm in using its assets to generate revenue
Asset management ratios:
Measures the extent to which a firm relies on debt financing in its capital structure
carrying too much debt
Leverage ratios:
Measures the rate of return a firm earns on various measures of investment
Profitability ratios:
Projection showing how a firm’s budgeted sales and costs will affect expected net income
Budgeted income statement
Projected financial statement that forecasts the types and amounts of assets a firm will need to implement its future plans
Budgeted balance sheet
Forecast of future cash flows that helps financial managers identify when their firm is likely to experience temporary shortages or surpluses of cash
looking for window : we’ve received stuff from our supplier, but no customer yet
Cash budget
Granted by sellers when they deliver goods and services to customers without requiring immediate payment
Bought the supplies for finished goods but don’t have money to pay back for supplies yet so you can sell the good to pay them back
Trade credit:
Providing short-term financing to firms by purchasing their accounts receivables at a discount
Someone else track down recievables
Factor Firm
Arrangement between a firm and a bank; bank pre-approves credit up to a specified limit, provided that the firm maintains an acceptable credit rating
As long as nothing changes, I will lend you $ whenever up to $X
Line of credit:
Bank makes a binding commitment to provide funds up to a specified credit limit at any time during the term of the agreement
During a time period, bank has money on hand for you
Charging you interest for money u borrow and a fee for the money you didn’t borrow
Revolving credit agreement:
Short-term promissory notes issued by large corporations
Large firms, IOU, sell the IOU’s and pay it back during high points not low points
Commercial paper:
Long-Term Financing Methods
Direct Investments from owners
long term debt
term loans
corp bonds
: Part of a firm’s net income that is reinvested
Retained earnings:
: Restriction that lenders impose on borrowers as a condition of providing long-term debt financing
Terms for loaning a lot of money
Covenant:
Mix of equity and debt financing a firm uses to meet its permanent financing needs
How much debt you want to take on vs how much use equity (stocks)
Capital structure
Magnifies the return on the stockholders’ investment when times are good
Reduces the financial return to stockholders when times are bad
Financial leverage
Pros and Cons of Debt Financing
Pros
Interest payments that a firm makes on debt are a tax-deductible expense
Enables the firm to acquire additional funds without requiring existing stockholders to invest more of their own money or the sale of stock to new investors
Cons
Required to make fixed payments
Creditors often impose covenants on the borrower
Pros and Cons of Equity Financing
Pros
More flexible and less risky than debt financing
Imposes no required payments
Cons
Doesn’t yield the same tax benefits as debt financing
Existing owners might not want a firm to issue more stock, since doing so might dilute their share of ownership
Company that relies mainly on equity financing forgoes the opportunity to use financial leverage
Firm’s cash refers to
holdings of currency plus demand deposits
Highly liquid assets that many firms list with their cash holdings
such as us treasury bills or money market mutual funds
Cash equivalents:
Short-term marketable IOUs issued by the U.S. federal government
U.S. Treasury bills
Fund that pools funds from many investors and uses these funds to purchase very safe, highly liquid securities
Money market mutual funds
Setting credit terms
Establishing credit standards
Deciding on an appropriate collection policy
Managing accounts receivable
Stocks of finished goods, work-in-process, parts, and materials that firms hold as a part of doing business
Inventories -
Don’t be out of stock but don’t buy too much (don’t want to spoil or become bad)
Inventory management:
Process a firm uses to evaluate long-term investment proposals
Capital Budgeting
Dollar today is worth more than later dollar
time value of money
Interest-earning deposit that requires the funds to remain deposited for a fixed term
Certificate of deposit (CD):
Amount of money that, if invested today at a given rate of interest, would grow to become some future amount in a specified number of periods
Present value
Sum of the present values of expected future cash flows from an investment, minus the cost of that investment
Net present value (NPV)
