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Unformatted text preview: CHAPTER 1 ROI= (Profit/ amount invested); Return on investment (ROI) is the amount of PROFIT earned by a business that could be paid to owners Return of investment- If Maria and Stan withdraw MORE than $1700 (their ROI/profit) from their business, the additional amount withdrawn is a return OF investment. For a company to maintain its capital (amount invested by its owners), it must pay a return to owners from profits the company has earned. Otherwise, the company is reducing its capital by returning a portion of owners investments to them. An effective business is one that is successful in providing goods and services demanded by customers. An efficient business is one that keeps the cost of resources consumed in providing good and services low relative to the selling prices of those goods and services Primary (line) functions: production, distribution, marketing, services Support (staff) functions: research, design, financing, legal services, info systems, accounting, human resources, purchasing Advantages of corporations: continuous lives , limited liability (shareholders not personally liable for debts of a corporation), professional managers hired to run company (not shareholders), shareholders cannot enter into contracts or agreements that are binding on a corporation unless they are managers or directors, Easier to raise large amounts of capital Disadvantages of corporations: must pay taxes on their income, regulated by various state and federal gov. agencies, compliance w/ disclosure regulations is costly and some of the required disclosures may be helpful to competitors, large corporations make them difficult to manage , owners of corporations usually do not have access to info about the companys day-to-day activities, Moral hazard may exist A partnership can be organized as a limited liability partnership (LLP). The LLP restricts the personal liability of each partner for obligations created by the company Mutaul agency- a legal right that permits a partner to enter into contracts and agreements that are binding on all members of a partnership Moral hazard- when more benefits for managers than contributors, shareholders More debt you have the higher the risk Financial accounting is the process of preparing, reporting, and interpreting accounting info that is provided to external decision makers GAAP are standards developed by professional accounting organizations to identify appropriate accounting and reporting procedures Managerial accounting is the process of preparing, reporting, and interpreting accounting info that is provided to internal decision makers Audit- detailed examination of an organizations financial reports Securities and exchange commission- a gov. agency that examines corporate financial reports to verify their conformance with GAAP and SEC requirements Heirarchy : Congress Passed to SEC Passed to Accounting profession...
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- Fall '07