23:29
CHAPTER1
Business:anyactivitythatseekstoprovidegoodsandservicesforprofit
Entrepreneur:risksinbusiness
SamWaltonWalmart(onestoreinArkansas)
BillGatesMicrosoft
Revenue:totalmoneyearned
Loss:expensesaremorethanrevenue
About80000businessinUSclosedownannually
Risk:chanceoflosingtimeandmoneyonabusiness
Moreriskmay=moreprofit
Businessesaddtostandardoflivingandqualityoflife
Providejobsemployeespaytaxesgovthelpspublic
Circular
Businesspayteaxes
Wealththatbusinessgeneratesandtaxestheypayhelpeveryoneinthecommunity
Standardofliving:amountofgoodsandservicespplcanbuyw/moneytheyhave
UShashigheststandardofliving
JapanandGermanymakemoremoneybutthingscostmore
Qualityoflife:generalwellbeingofasocietypoliticalfreedom,acleannatural
environment,education,healthcare,safety,freetime,satisfaction
Businesses
Nonprofitorg
Govtagencies
RespondingtoVariousBusinessStockholders
Stakeholders:pplwhogainorlosebypoliciesandactivitiesofabusiness
Customers
Employees
Stockholders
Suppliers
Dealers
Bankers
Communityinterestgroups
Environmentalists
Electedgovtleaders
Outsourcing:contractingwithothercompaniestodostuffforthefirm(usuallyother
countries)
Jobslosttooverseascompetitors
Globalization
Insourcing:jobsinsidecountry
CreatesjobsinUS
UsingBusinessinNonprofits
Nonprofitorg:goalsdonotincludepersonalprofit;gainsusedforsocialimprovement
Socialentrepreneurs:usebusinessprinciplestostartandmanagenonprofits
BillDraytonfounderofAshokaseeksoutsocialentrepreneursandsetsup
networksamongthem
Businessskillsinclude
Informationmanagement
Leadership
Marketing
Financialmanagement
OWNINGBUSINESSVSEMPLOYEE
Employee:
Paidvacation
Healthbenefits
Steadyincome
Owningbusiness:
Nobenefits
Nohealthinsurancefromcompany
Incomefluctuatesbasedonearnings
Minoritiesandwomenownmadbusinesses
FactorsofProduction:contributetowealth
Land
Labor
Capital(meansofmanufacturing)
Entrepreneurship
Knowledge(recentlyadded)
Siliconvalley knowledgeworkers
RICHCOUNTRIES=entrepreneurship+knowledge
Freedomisimportanttoeconomicdevelopment.
freerthecountryisthewealthierthecitizensare.
freedomsinclude
freefromexcesstaxation
govtregulations
restrictionsontrade
^allthestuffthatcausedtherecessionexceptthelast
GDP:totalvalueoffinalgoodsandservicesdividedbythenumberofpeople
THEBUSINESSENVIRONMENT
Consistsofthesurroundingfactorshelp/hinderdevelopmentofbusiness
Fiveelements
Economicandlegalenvironment
Peoplemakebusinessesifriskoflosingmoneyislow
Govtcankeeptaxesandregulationstominimum
Allowprivateownershipofbusiness
Minimizeinterferencewithfreeexchangesofgoodsandservices
Govtcanpasslawsthatenablebusinessppltowritecontractsforcourt
UNIVERSALCOMMERCIALCODE:coverscontractsandwarrenties
Currencytradeableinworldmarkets
Minimizecorruption
MarthaStewart
Enron
Technologicalenvironment
InformationTechnology(IT):computers,modems,cellphones,internetetc
Makebusinesseffective,efficientandproductive
ECommerce
Businesstoconsumer
Businesstobusiness
JeffBezos foundedAmazon;neededtoadapttochanges
Techcanhelpwithcustomerservice
Database:electronicstoragewhereinfoiskept
Companiestradedatabases=bettermarketing
CON:identitytheft
Competitiveenvironment
Somefocusonquality
Focus:highqualityandoutstandingserviceatcompetitiveprice
Competingbyexceedingcustomerexpectationscustomercomesfirst
Restructuringandempowering
Empowerment=clerksandreceptionistsmusthaveskillsandfreedomsforquick
customerresponse)
Socialenvironment
Demography:statsofpopulationaboutsizedesnityandothercharacteristics
Managingdiversity
Increaseinoldpplbusinessesgearedtowardselderlyascustomerbase(social
securitygoingdown!)
Twoincomefamiliespregnancybenefits,nannies
Globalbusinessenvironment
Internationalcompetitionandfreetrade
Needgooddistributionsystemsandcommunication
Globalization(LenovoisChinesewtff)
Warweaponsindustry,organization&security
Jobsincreaseworldwide(butmightlessonincountry)
EVOLUTIONOFAMERICANBUSINESS
Fewerneededinfarmsandmanufacture
AgriculturalandManufacturingindustry
Droppedbcoftechnology
Peopleleftagricultureandfactoryforservicerelatedjobs(morethanhalfofUS
economy)
Futureforcollegekids:servicejobs
Maybeneweraininfotech
Highpaying
CHAPTER2
Economics:studyofhowsocietychoosestoemployresourcestoproduceanddistribute
forconsumption
Macro
Micro
Somedefineeconas:allocationofscarceresources resourcesarescarceand
needtobedividedproperly
Resourcedevelopment:studyofhowtoincreaseresourcesandcreateconditionsthat
makebetteruseofresources(conservation,etc)
TheDismalScience
Malthusianism:toomanypeople,toolittlewealth
Solutiontopoverty=birthcontrol
AdamSmith
Systemforcreatingwealth
AnInquiryintotheNatureandCausesoftheWealthofNations(WealthofNations)
Freedomtoownlandandpropertyimportant
Profitpeopleneedincentive
Fatherofmoderneconomics
BusinessesBenefitCountry
invisiblehandpeoplesetouttohelpthemselvesbutothersgethelpedinthe
process
Smith:ifpplbecomewealthytheywouldtrytohelpothers(notalwaystrue)
UNDERSTANDINGFREEMARKETCAPITALISM
Capitalism:allormostoffactorsofproductionanddistributionareprivatelyownedand
areoperatedforprofit
Foundationsofcapitalism
Therighttoprivateproperty
HernandoDeSoto
Righttoownabusinessandkeepprofits
Righttofreedomofcompetition
RighttoFreedomofchoice
FreeMarkets
Customerschoosebybuying
Pricetellsproducershowmuchtoproduce
Howpricesaredetermined
Bybuyersandsellersnegotiatinginthemarketplace
Ifpriceishigh,salesarelow,pricehastogolower;priceslow,salesarehigh,pricegets
higher
ConceptofSupply
Supply:quantityofproductssoldatdiffpricesataspecifictime
Supplyincreasesaspriceincreasesbcsellerscanmakemoremoneywithhigherprice
Demand:quantityofproductsthatpplarewillingtobuyatdiffpricesataspecifictime
Demandincreasesaspricedecreases
Equilibriumpt:wheresupplyanddemandlinesintersect
Keyfactorisprice
Atintersection,demandandsupplyareequalMARKETPRICE
Freemarketers:noneedofgovtinterferencebcsupplyanddemanddetermineprice
Onlypossibleifnothinginterfereswithmarketforces
COMPETITORSinfreemarket
Perfectcompetition:manysellersinmarketandnosellerlargeenoughtodictateprice
Productsidenticalagriculturalproductsareclosesttothis
Notrueexampletodayofperfectcomp
Monopolisticcompetition
Largenumberofsellersmakeproductsthatarealikebutperceivedbybuyersasdiff
Productdifferentiationiskey(brandnames,etc)
Oligopoly:fewsellersdominatemarket
Onereasonthishappensisthatinitialinvestmentishigh
Again,productdifferentiationiskey
Monopoly:onesellerforaproductorservice
USlawprohibitsthis
Possibleforutilitycompanies
Deregulation:legislationendmonopolystatusofallowbuyerstochoose
PROSandCONSoffreemarket
PROS
Opencompetition
Qualityproductatfairprices
Nostrictsocialhierarchy
Capitalismencouragesbusinessestobemoreefficient
CONS
Unevendistributionofwealth
Olddisabledetccantstartbusinesseseffectively
Ledtochildlaborandslavery
Greeddictatesactionsnoethics
Drugs
Illegalactivity
SOCIALISM
Basedonpremisethatsome,ifnotmost,basicbusinesses(likeutilities)shudbeowned
bygovtsoprofitscanbeevenlydistributed
Businessestaxesarehigh
Socialistcountrytaxes=60%
PROSANDCONSofSocialism
PROS
Socialequality
Freeeducation,evencollege
Freehalthcare
Freechildcare
Longervacations
Workfewerhrperweekandgoodemployeebenefits
CONS
Takesawaybusinessincentives
Hightaxes
Braindrainsmartpplleavetoothercountriestostartbusinesses
Workersdontworkashard
COMMUNISM
Economicandpoliticalsysteminwhichstatemakesalmostalleconomicdecisionsand
ownsallbusiness/factorsofproduction
PROSandCONS
PROS
Completesocialequality
CONS
Fewfreedoms
Govtdoesntknowwhattoproducewhatpublicwantsshortagesresult
Businessppldontworkhard
NorthKoreastarvation;CubaandVenezuela
MIXEDECONOMIES
Freemarketeconomieswithsocialisticpolicies
Existwheresomeallocationofresourcesaremadebythemarketandsomebygovt
ECONOMYOFUNITEDSTATES
3economicindicatorstellyouhowwelleconomysdoing
GDP
Unemploymentrate
Priceindexes
Otherimportantstats:incordecinproductivity
GDP:totalvalueoffinalgoods/servicesincountry
Includesforeignownedbusinessesifitsinthecountry
ActualGDPislargerthanofficialbcofillegalshit
Unemploymentrate:numberofpplatleast16unemployedandtriedtofindajobw/i
priorfourweeks
PriceIndexes:measurehealthoftheeconomybymeasuringlevelsofinflation,
disinflation,deflationandstagflation
Inflation:generalriseinpriceofgoodsandservices
Rapidinflationisbad
Costgoesup,moneyvaluegoesdown
Disinflation:priceincreasesslow,inflationratedeclines
Deflation:pricesdeclinewencountriesproducesomanygoodsthatpplcantbuyem
all
toofewdollarschasingtoomanygoods
ConsumerPriceIndexCPI:monthlystatsthatmeasureinflationordeflation
NewCCPI,chainedconsumeretcnewmethodthatfollowsconsumerhabits
ProducerPriceIndexPPImeasurespricesatwholesalelevel
ProductivityinUS
Wentupbcoftechnology
Higherproductivity=lowercostsformanufacture
Becomesanissuewithservicebasedeconomygettingslowerbcoflesstechnology
thanmanufacturing
ProductivityinService
Techaddstoqualitybutnotproductivity
BUSINESSCYCLE
Periodicrisesandfallsineconomiesovertime(4phases)
Economicboom
Recession:2+consecutivequartersofdeclineinGDP;highunemployment,high
businessfails,dropinstandardofliving
Depression:severerecessiondeflation
Recovery:economystabilizesandstartstogrowbacktoboom
StabilizingeconomythruFISCALPOLICY
Fiscalpolicy:fedgovteffortstokeepeconomystablebyincreasingordecreasingtaxes
orgovtspending
Taxation
Hightaxessloweconomyandlowtaxesgiveeconomyaboost
Govtspending
Nationaldeficit:moneythatfedgovtspendsoverandabovetheamountitgathersin
taxes
Nationaldebt:sumofgovtdeficits
Now,about$14trillion
Nationalsurplus:taxrevenuesexceedexpenditures(lasttimeunderClinton)
MONETARYPOLICYtokeepeconomygrowing
FederalReserveBank(theFed)adds/subtractsmoneyfromeconomy
Notunderdirectcontrolofgovt
Monetarypolicy:managementofmoneysupplyandinterestrates
Fedraisesandlowersinterestrates
Interestratesincwheneconomyisbooming
Interestrateslowerwheneconomyisreceding(borrowmore,companiesgetmore
done)
Fedcontrolsmoneysupply(moneyavailabletopublic)
InboomFedlowersthemoneysupply
InrecessionFedraisesmoneysupply
CHAPTER3
GLOBALMARKET
USlargestimportingmarket
GermanyChinaJapanhighestexporters.
Globaltrade:allowsnationstoproducewhatitsgoodatandbuywhatitneeds
Freetrade:movementofgoodsandservicesamongnationsw/opoliticaloreconomic
barriers
Debated
THEORIESOFCOMPARATIVEANDABSOLUTEADVANTAGE
ComparativeAdvantageTheory
DavidRicardo
Freeeconomicexchange
Acountryshouldselltoothercountriesthoseproductsthatitproducesmosteffectively
andefficiently,andbuyfromothercountriesthoseproductsitcannotproduce
effect&effic
USsoftwareandengineeringservices
Absoluteadvantage:monopolyonproducingaspecificproductorisabletoproduceit
moreefficientlythanallothercountries
SouthAfricahadabsoluteadvantageindiamondproduction
Involvementinglobaltrade
Smallbusinesseshalfofprivatesector,30%exportsandmoreinvolvedinglobal
market
Importingideasfromforeigncountries(starbucksideaformedinItalyhowardshultz)
ExportingthingsthatareavailableinUSbutunavailableelsewhere(ICEinAfrica)
MeasuringGlobalTrade
2indicatorsbalanceoftrade&balanceofpayments
balanceoftradetotalvalueofnationsexportscomparedtoimports
tradesurpluswhenexportvalueismorethanimports
tradedeficit^opposite
balanceofpaymentsdifferencebtwnmoneycomingintocountrythanleavingcountry
fromexports,importsandotherfactorsliketourism,foreignaid,militaryexpenditures,
investmentsetc
goalalwayshavemoremoneyflowingintocountrythanoutofit
Freeandfairglobaltrade
Dumping:sellingproductsinforeigncountryatlowerpricesthanthosechargedin
producingcountry
Usedtoreducesurplusproductsinforeignmarketsortogetmoremoneyfromnew
markets
STRATEGIESFORREACHINGGLOBALMARKETS
Licensing,exporting,franchising,contractmanufacturing,internationaljoint
venturesandstrategicalliances,foreignsubsidiaries,foreigndirectinvestment
Licensing:righttomanufactureproductorusetrademarktoaforeigncompany
(licensee)forafee(royalty)
Companygainsrevenue
Disney,CocaCola,Altria
Licensorsspendlittlemoneytoproduceandmarketproductsbcthesecostsarepaidby
licensee
Bulkofprofitbelongstolicensee
Licensorsellsexpertiseinaproductareaandlicenseecanbreakoffandstartbusiness
withnewknowledge
Exporting
EACsExportAssistanceCentersexportingassistanceandtradefinancesupportfor
smallbusinesses
Exporttradingcompaniesorexportmanagementcompaniesassistinnegotiatingand
establishingtradingrelationstooandeasesprocesseslikedocumentation,customs,etc
Franchising
Someonew/agoodbusinessideasellsrighttousethebusinessnameandsella
productorservicetoothers
Globalfranchisingnotlimitedtolargefranchises
Butmustadapttoenvironmentsellingin
ContractManufacturing
Foreigncompanyproducingprivatelabelgoodsdomesticcompanystickstrademark
onit
Partofoutsourcing
Allowscompanytoexperimentinnewmarketsw/ohighstartupcosts lowrisk
InternationalJointVentures&StrategicAlliances
Jointventure:partnershipof2+companiestotakeupmajorproject
PopularinChina
Benefits:
Sharedtechandrisk
Sharedmarketingandmanagement
Entryintomarketswhereforeigncompaniesareusuallynotallowed
CONS:
Exposingcompanyinfo
Strategicalliance:longtermpartnershipbtwn2+companiestobuildmarketadvantages
Doesnotinvolvesharingrisk,costs,tech,ormaybeprofits
ForeignDirectInvestments
Buyingofpermanentpropertyandbusinessinforeignnations
Mostcommonforeignsubsidiary:companythatisownedinaforeigncountryby
anothercompany(parent)
Likeadomesticfirm
Homecountryandforeigncountrylawsmustbeobserved
Companyownssubsidiarycompletelybutmustoffermad$$atstart
Multinationalcorporation:manufacturesandmarketsinmanydiffcountriesandhas
multinationalstockownershipandmanagement
FORCESinTRADINGANDGLOBALMARKETS
Socioculturalforces
Understandingculturaldiversityinglobaltrade
EconomicandFinancialforces
Diffbuyingbehaviorsindiffcountries
Considerlowpercapitaandluxuriesinonecountry
Considereconomicconditionsinothercountries
Exchangerate:valueofonenationscurrencyrelativetoothernations
Highvalueofdollarmeansthatitwudbetradedformoremoneythanbefore
Productsofforeignproducerswudbecheaper
ButUSproducedgoodswudbecomemoreexpensive
Floatingexchangerates:currenciesarenotstandardbutfloataccordingtosupplyand
demand
Devaluation:loweringthevalueofanationscurrencyrelativetoothercountries when
moneyvaluegetslow
Lastresort:bartering
Countertrading:manycountriesinvolvedinbartering20%internationaleconomic
relationsandusuallyindevelopingcountries
LegalandRegulatoryforces
Nolawsonglobalmarket
Manydomesticlawscontradictlawsofdiffnations
Physicalandenvironmentalforces
Transportation
Techdifferences
TRADEPROTECTIONISM
Useofgovtregulationstolimitimportofgoodsandservices
Mayallowdomesticproducerstosurviveandgrowandproducemorejobs
Guardagainstdumping
Slowforeigncompetition
Tariffs:taxesonimportsencouragedlessimports
Protectivetariff:importtaxesraiseretailpriceofimportedproductssopplstickto
domesticgoods
Revenuetariffs:raisemoneyforgovt
Importquota:limits#ofgoodsincategoriesthatnationcanimport
Embargo:completebanonimportorexportofaproductwithacertaincountry
nontariffbarriers:informalbarriers,notofficial
WorldTradeOrganizationWTO
Mediatestradedisputes
GenevaSwitzerland
Issues
Dismantlingprotectingofmanufacturedgoods
Eliminatingsubsidiesonagriculturalproducts
Overturningtemporaryprotectionistmeasuresthatstopglobaltrade
Commonmarkets
Commonmarket/tradingbloc:regionalgroupofcountriesthathavecommonexternal
tariff,nointernaltariffs,andthecoordinationoflawstohelpexchangebtwnmember
countries
EU
Mercosur(SouthAmcommonmarket)
NAFTA
FreetradeareaamongUSCanadaandMexico
Promotesfaircompetition
Eliminatestradebarriers
Increaseinvestmentopportunities
Effectiveprotectionforintellectualpropertyrights
Frameworkformoretradingblocs
Improveworkingconditions
Increasedrevenuebutlostjobs
LaunchofCAFTAwithcentralAmericancountries
FUTUREOFGLOBALTRADE
Chinagoodforeigninvestment
Thirdlargestexporter
Largestglobalconsumerofcommoditiesandsecondlargestconsumerofoil
ConcernsaboutChinesegovt
Piracyandcounterfeiting
Chinaisopentotradeandinvestments,educatedworkforceandstableinfrastructure
IndiaandRussiaemergingmarkets
Indiainfotech,pharma,biotech
Stillhasdifficulttradelaws
Russiaindustrializedwithmadnaturalresources
OffshoreOutsourcing
Outsourcing:purchaseofgoodsandservicesfromsourcesoutsideofafirm
Insteadofjustoutsourcingmanufacture(doneforawhile),wearenowoutsourcing
skilledjobs,servicerelatedjobsinourserviceeconomy resultsinlossofUSjobs
ChinaandIndia
Chinamanufacture
Indiatelemarketing,dataentry,billing,etc
TalentswillkeepgrowingbutChineseandIndianskillischeaperandjustaseffective
CHAPTERFOUR
ETHICS
Enroncreatedoffthebookspartnershipstohidedebtsandlosses
WorldCom,TycoInternational,ImClone,HealthSouth,andBoeingalsoscandalous
Newlawsmakeaccountingrecordstransparent
ManagingBusinessesEthicallyandResponsibly
Goalsandincentivescrateanenvironmentinwhichmistakesoccurandmanagersdid
notcorrectthem
Pressureentailsmoreunethicalbehavior
CorporateEthicalStandards
Compliancebasedethicscoddes:emphasizepreventingunlawfulbehavior
Increasedcontrolandpenalization
Integritybasedethicscodes:organizationsguidingvalues,environmentthatsupports
ethicallysoundbehavior
Stressasharedaccountabilityamongemployees
Sixstepprocess
Managementmustsupportcodeofconductw/oexceptions
Employeestakemanagementasrolemodelstopdowngoodbehavior
Managerstrainedtodetectethicalimplicationsofactions
Ethicsoffice
Whistleblowersmustbeallowedanonymityandprotection
Outsidersassociatedwithcompanymustbetoldofethicalvaluesofcompany
Ethicscodemustbeenforcedpenalties
CorporateSocialResponsibility
Concernbusinesseshaveforthewelfareofsociety(CSR)
Concernforallstakeholders
Critics
Managerssoleresponsibilityistomakemoneyforstockholders,otherwiseitssocialism
MoneyspentonCSRisstealingfrominvestors
Supporters
Businessesoweexistencetosociety
AdamSmithbelievedbusinessforselfinterestwaswrong
Corporatephilanthropy
Charity
Corporatesocialinitiative
Enhancedphilanthropy
Directlyrelatedtocompanyscompetencies
Corporateresponsibility
Hiringminorityworkers
Environment
Safeproductsetc
Corporatepolicy
Positiononsocialandpoliticalissues
ResponsibilitytoCustomers
Dontlietothem
Goodcustomerserviceprotectssales
ResponsibilitytoInvestors
justbeethical
insidertrading:insidersusingprivatecompanyinfotofurthertheirownwealthorfam
andfriends
MarthaStweartguiltyoflyingaboutsuchtrading
SECRegulationFD(fairdisclosure)ifcompanytellsanyone,theyhavetotell
everyone
Somemisusedinfoforownbenefitatexpenseofinvestors
Officialrevenuewasmuchhigherthanactualrevenue
Investorsinvestedmoreandlostout
ResponsibilitytoEmployees
Growth=creationofjobs
Chanceofupwardmobility
Keepemployeeshappyandtheirworkwillbebetter
ResponsibilitytoSocietyandEnvironment
Createsjobs
Promotesocialjustice
Mostcrucialinstitution
Begoodtopeopleandnaturebasically
Thetrickforcompaniesistofindtherightpublicgoodthatwillappealtotheir
customers
wowwwthatslowsocialgoodisnowaformofacceptedadvertisement
SocialAuditing
Systematicevaluationofanorganizationsprogresstowardimplementingprogramsthat
aresociallyresponsible
Workplaceissues
Environment
Productsafety
Communityrelations
Humanrights
Rightsoflocalpeople
Watchdogs
Sociallyconsciousinvestors
Environmentalists
Unionofficials
Customers
Internationalethicsandsocialresponsibility
Businessesrefusetoworktoviolatorsofethics
Childlabor
Chineseprisonlaborsears
Nikegotcaughtwithexcessivelaboringworkers
Debate:locallivingwage
CHAPTER17
ACCOUNTING
Recording,classifying,summarizingandinterpretingoffinancialeventsand
transactionstoprovidemanagementandotherinterestedpartiesinfotheyneedtomake
gooddecisions
Basicallyorganizingandanalyzingmovementofmoneyinbusiness
Accountingsystem:methodusedtorecordandsummarizeaccountingdataintoreports
Functions:
Gooddecisionmaking
Informingstakeholders
Employees
Owners
Creditors
Suppliers
Unions
INVESTORS
Govtfortaxes
AreasofAccounting
5keyworkingareas:managerial,financial,auditing,tax,andgovtandnotforprofit
Managerial:infoandanalysestomanagersdecisionmaking
Costsofproduction
Marketing
Budgetplanning
Budgetcontrol
Minimizingtaxes
CMACertifiedManagementAccountant:promanagerialacctcertifiedbyICMA
Financial:infoandanalysesareforpploutsidecompany
Goestomanagementbutalsoto
Creditorsandlenders
Employeeunions
Customers
Suppliers
Govtandpublic
Makesannualreport:yearlystatementoffinancialconditionprogressandexpectations
Privateaccountant:somebusinesseskeeponespecificallyforcompany
Publicaccountant:providesservicesonfeebasis
AmericanInstituteofCertifiedPublicAccountantsAICPA
CertifiedpublicaccountantCPA
FinancialAccountingStandardsBoardFASBdefinesgenerallyacceptedaccounting
principlesGAAPacctsmustfollow
EnronandArthurAnderson(accfirm)
SarbanesOxleyAct:newgovtreportingstandardsforpubliccompanies
PCAOBPublicCompanyAccountingOversightBoard:overseetheAICPA
Auditing:evaluatingrecordsusedtopreparecompanysfinancialstatements
IIAInstituteofInternalAuditors
CIAcertifiedinternalauditor
TaxAccounting:trainedintaxlawandresponsiblefortaxreturnsandstrategies
GovtandNotforProfitAccnting
Workingfororganizationswhosepurposeisntomakingprofitbutservingratepayers,
taxpayers,andothers
Govtneedsanaccountingsystemthatfillneedsofinformationusers
Citizens
Specialinterestgroups
Legislativebodies
Creditors
Ensurethatgovtisdoingitsjobproperly
StandardsaresetbyGovernmentalAccountingStandardsBoardGASB
Charitiesneedaccountantstoshowwheretheirmoneygoesforcustomersandtaxes
TheAccountingCycle
6stepprocedurepreparationandanalysisofmajorfinancialstatements
Analyzesourcedocs
Recordtransactionsinjournals
Transferjournalentriesintoledger
Ledgerscategorizeinfo
Takeatrialbalance
Trialbalance:summaryofallfinancialdataintheaccountledgertomakecertainthe
figuresarecorrectandbalanced
Preparefinancialstatements
Balancesheet
Incomestatement
Statementofcashflow
Analyzefinancialstatements
Bookkeeping:recordingofbusinesstransactions
Dividestransactionsintocategories
Sales
Purchasingreceipts
Shippingdocs
Recordfinancialdatafromoriginaltransactiondocstojournal
Doubleentrybookkeeping:havingtwosetsincasetheresamistakeinone
ComputersinAccounting
Efficient
Makesstufflessboring
Notusedfordecisionmaking
FinancialStatements
Summaryofallthetransactionsthathaveoccurredoveraparticularperiod
Balancesheetfirmsfinancialconditiononspecificdate
Whatcompanyownsandowes
Incomestatementsummarizesrevenues,costofgoods,expenses,taxes
Revenuefromsellingcomparedtocosts
Statementofcashflowsummaryofmoneycomingintoandgoingoutoffirm;cash
receiptsandcashpayments
Differencesbtwncashcomingandgoingoutofbusiness
TheFundamentalAccountingEquation
Assets=liabilities+ownersequity
Mustalwaysbebalanced
Equityinvestmentinbusiness(sometimesreferredtoasnetworth)
Formulaisbasisforbalancesheet
BalanceSheet
Financialconditionreport
3majoraccountsassets,liabilities,ownersequity
balancebtwntwofigures(equation)
Classifyingassets
Assets:economicresourcesownedbyfirm
Listedonbalancesheetbasedonliquidity
Liquidity:howfastassetcanbeconvertedtocash
Shorttermassetsmoreliquid
Longtermassetsland,fixedassets,etc
3categoriesbcofliquidity
currentassets:canbeconvertedintocashw/i1year
fixedassets:longterm,relativelypermanent
intangibleassets:longtermassetsw/nophysicalformbuthavevalue;patents,
trademarks,copyrights,goodwill
LiabilitiesandOwnersEquityAccounts
Commonliabilityaccountsonbalancesheets
Accountspayable;moneyowed
Notespayable:promisestorepaybycertaindate;canbeshortorlongterm
Bondspayable:longterm
Assetsliabilities=equity
Stockholdersequity(orshareholders)valueofwhatstockholdersowninfirm(same
asownersequity)
Retainedearnings:accumulatedearningsthatwerenotpaidtostockholdersyet
Incomestatement
Profitnetincomeorloss
FormulafromGAAP:
Revenuecostofgoodssold=grossprofit
Grossprofitoperatingexpenses=netincomebeforetaxes
Netincometaxes=netincomeorloss
CostofGoodsSold:costofmerchandisesoldorcostofrawmaterialsandsupplies
usedforproducingitems
Includesmaterialandtransportation
Operatingexpenses
Rent
Salaries
Costofrunningabusiness
Depreciation:whenanitemisused,losesitsvalue
StatementofCashFlow
Reportscashreceiptsanddisembursementsrelatedto3majoractivities
Operations:cashtransactionsfromrunningbusiness
Investments
Financing:raisedfromissuanceofnewdebtorequity;cashusedtopaybusiness
expenses,pastdebts,ordividends
Statementofcashflowcategorizedbyactivity
AnalyzingFinancialStatements:RatioAnalysis
Ratioanalysis:infoputintoratiosandanalyzed
Comparesgoalstoactualperformance
Liquidityratios
Measurecompanysabilitytoturnassetsintocashforshorttermdebts
Currentratio:firmscurrentassetsovercurrentliabilities
Companywithcurrentratioof2orbetteriscreditworthy
Acidtestratio(quickratio):cash,marketablesecurities(stocksandbonds),receivables
ofafirmovercurrentliabilities
Cash+accountsreceivable+stocks&bonds/liabilities
Btwn.51mighthavecashflowproblems
Leverage/Debtratios
Measureshowmuchcompanyreliesoncredit
Totalliabilities/ownersequity
Above100%meansmoredebtthanequity
Profitability/PerformanceRatios
Howeffectivelyfirmusesresourcestoprofit
EPSearningspershare
Basic:netincomedividedbynumberofcommonstockshares
Profitperstock
Diluted
Returnonsales:netincomedividedbynetsales
Comparew/competition
Returnonequity:netincomeaftertaxdividedbyownersequity
Howmuchearnedforeachdollarinvestedbyowner
Activityratios:
Inventoryturnoverratio:costofgoodssold/avginventory
Conversionofinventoryintosales
Chapter19
SECURITIESMARKETS
NYSEandNASDAQfinancialmarketplacesforstocksandbonds;2functions:
Helpbusinessesfindlongtermfunding
Privateinvestorshaveaplacetobuyandsellsecurities/investments
Primary&secondarymarkets
Primarysaleofnewsecurities
IPOinitialpublicoffering
Corpsonlymakemoneyw/firstsale,therestissecondarytradebtwninvestors
Manybusinessesusecorporatebondsorsellingstocktopayofflongterm
debt/financing
InvestmentBankers:specialistswhoassistinissueandsaleofnewscrties
HelpprepareanalysesforSECapproval
Buysscrtiesatdiscountandsellstoinvestorsatfullprice
Institutionalinvestors:pensionfunds,mutualfunds,etc investcustomermoney
Debtfinancingbysellingbonds
Bond:pplbuybonds=businessesgetloansfromppl
Businesspaysbackwithinterest(interestrate=couponrate)
Issuedw/denomination:debtinonebond
Principal:facevalueofbondpaidbackinfullaftermaturity
Pros
cons
Managementhasfullcontroloverbusiness Increasedebt/liabilities(longterm)
bcbondpplarecreditorsnotowners
Interestonbondistaxdeductible
Temporaryfunding
Canberepaidbeforematurityandcanbe
convertedtostock
Interestmustbepaidorcourt
Difftypesofbonds
Unsecuredbonds:notbackedbycollateral
Debenturebondsonlycompanieswithawesomecreditcanissue
Secured:backedbytangibleasset
Mortgagebondcollateralislandandbuilding
Specialbondfeatures
Sinkingfund:ensuresthattheresenough$torepaybondholders
Callablebond:bondissuercanpayoffprincipalbeforematuritydate
Convertiblebond:canbeturnedintocommonstock
Equityfinancing:longtermfunding
Stocks:sharesofownership
Parvalue:valueofstockbutnowstockpricesarenotthesamesonotusedanymore
Dividends:firmsprofitsdistributedtostockholders(notrequiredtopay)
Pros
Cons
Stockholdersdonthavetoberepaid
Stockholdershavesayinbusiness
management
Nolegalobligationtopaydividends
Dividendsnottaxdeductible
Sellingcanimprovefirmsbalancesheet
bcitcreatesnodebt;corporationcanalso
buybackstock
Managementsdecisionscanbeaffected
bctheyhavetokeepstockholdershappy
PreferredStock:preferenceinpaymentofdividendsandhaveclaimonassetsifcomp
goesoutofbusiness
Blendbtwnstockandbondnovotingright
Haveparvaluew/dividenddivpaidbeforecommonstockdiv
Canbecallableorconvertible
CommonStock:basicformofownership
Votingrights
Dividends
Preemptiverightpriorityinbuyingnewstocks
Stockexchanges
Membersbuy&sellsecuritiesforcompaniesandindividualinvestors
RegulatedbySEC
NYSE:largeststockexchange
AMEX:secondlargest
OTCoverthecountermarketunregistered,electronicexchange
NASDAQcameoutofOTC
Telecommunicationsnetwork,notfloorbased
TheSEC
SecuritiesActof1933:protectedinvestorsbyrequiringfulldisclosureofinfobyfirms
SECregulatesactivitiesinvariousexchanges
Beforecompanysellsstock,mustregisterwithSEC(prospectus)
Preventinsidertrading
GlobalStockExchanges
USbrokershaveconnectionswithglobalexchanges
HowtoInvestinSecurities
Stockbroker:registeredrepintermediarybtwnpplandstockmarket
Process
Findstockbroker
Placeorder
Stockbrokercontacts
Companyconfirmsyayyouhavestock
OnlineInvesting
Cheaper
Mustbewillingtodoyourownresearch
Investmentstrategies
Thingstoconsider:time,security,risk
Stocksorbonds?
5keycriteria
investmentrisk
yield
duration
liquidity
taxconsequences
InvestinginBonds
Lowrisk,guaranteedincome(govtbondsaresafest)
Corporatebondscansellonstockexchangebeforematurity
Bondsfluctuateinverselyw/marketinterestrates
Interestincwhilebondpricedecrisk
InvestinginStock
Capitalgain:profitfromstockholdersellingstock
Growthstocks:expectedtorisefasterthanotherstocks
Incomestocks:highdividend
Bluechipstocks:regulardividendsandconsistentgrowthinprice
Pennystocks:<$2riskyinvestments
Marketorder:tellsbrokertobuy/sellatbestpriceimmediately
Limitorder:buy/sellatspecificprice
Stocksplits
Issuetwoormoresharesforeveryshareofstockcurrentlyoutstanding
MutualFundsandExchangedTradedFunds
Mutualfund:buysstockandsellssharestopublic
Poolsinvestormoney
Exchangetradedfunds:ETFscollectionofstocksthataretradedonexchangesbut
tradedmorelikeindividualstocksthanlikemutualfunds
Diversifyinvestments
HIGHRISKINVESTMENTS
Junkbonds:riskybondswithhighyield,gradeBBorlower
Stocksonmargin:purchasingstocksbyborrowingpurchasecostfrombrokeragefirm
Mustpaybackbroker
Brokercanissuemargincallinvestormustpaymoremoneyifstockgoesdown
Investingincommodities
Commodityexchange:buying/sellingofmetals,mineralsandagriculturalgoods
Futuremarkets:purchaseandsaleofgoodsfordeliverysometimeinthefuture
Stockmarketindicators
DowJonesIndustrialAvg:avgcostof30selectedindustrialstockstogiveanindication
ofhowstockmarketisdoing
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