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Intro to Business

by: Jordan Kratz

Intro to Business MGMT 11100

Marketplace > Ithaca College > Business > MGMT 11100 > Intro to Business
Jordan Kratz

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Intro to Business
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Intro to Business
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This 12 page Study Guide was uploaded by Jordan Kratz on Wednesday January 27, 2016. The Study Guide belongs to MGMT 11100 at Ithaca College taught by Quigley in Fall 2015. Since its upload, it has received 48 views. For similar materials see Intro to Business in Business at Ithaca College.


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Date Created: 01/27/16
Chapter 8,9,10  Test 3 Study Guide  Chapter 8 Accounting:   Decision making by the numbers  System for recognizing, organizing, analyzing, and reporting information about the  financial transactions that affect an organization   Used By: o Managers o Stockholders o Employees o Creditors o Suppliers o Government Agencies   Done By: o Public accountants o Management accountants  internal auditors o Government accountants  Financial Accounting   Addresses external stakeholders needs  Generally accepted accounting principles (GAAP): Guide the practice of financial  accounting  Financial Accounting Standards Board (FASB): Organization that Securities Exchange  Commission has delegated authority to develop rules Accounting Principles:Objectives   Ensure financial statements are: o Relevant  o Reliable o Consistent  o Comparable  Financial Statements   Balance Sheet o Summarizes a firm's financial position at a specific point in time   accounting equation: assets= Liabilities + Owners Equity o Assets: Things of value a firm owns  o Liabilities: Indicate what the firm owes to non­owners o Owners equity: Claims the owners have   Income Statement  (Profit and loss statement)  o Summarizes the financial results of a firms operation over a given period of time   revenue­expenses = net income  o Revenue: increase in the amount of cash and other assets the firm earns in a  given time period   Accruaal­basis accounting: Revenues are recorded when they are earned o Expenses: assets a firm uses, to carry out the business activities necessary to  generate its revenue  o Net income: Profit or loss the firm earns in the time period covered by the income statement   Statement of cash flows  o Identifies amount of cash that flowed into and out of the firms from three types of  activities   operating activities  investing activities  financing activities  Volkswagens cash flow statement 2011 : on powerpoint  Other Statements   Statement of Retained Earnings  o Shows how retained earnings have changed from one accounting period to the  next   Stockholders Equity Statement  o Shows how net income and dividends affect retaned earnings  ■BG Capital and D& B Specialty Foods have very different assessments of the capital  requirements of D & B (i.e., $13.5 million versus $2­3 million).  Is this this disparity an ethical red flag? ■Why is cash flow relevant to BG capital’s investment decision? ■Given the disparity in the assessments of D & B’s capital requirements (i.e., $13.5 million by  BG Capital versus $2­3 million by D & B Specialty Foods), what concerns might this raise about  D & B’s budgeting process? Financial Statements and their Benefits   Independent auditors report ­ results of an audit included in the annual report the firm  sends to its stockholders o unqualified, qualified, and adverse opinion   Checking the notes ­ Additional information that clarify and supplement the numbers on  the financial statement Trends in Financial Statements   Comparative financial statements  o Financial statements must list two or more years of figures side by side to  observe account value change over a time span   Horizontal analysis: using comparative statements to identify changes in key account  values over time  Purpose of Budgeting   Shows how a firm will acquire and allocate resources to achieve its goals over a time  period  o Helps specify how the goals are to be achieved  o Encourages coordination among managers and employees o Serves as a motivational tool  o Helps evaluate progress and performance  Preparing the Budget   Top­down budgeting  o top management prepares the budget with little or no input from middle and  supervisory managers   Bottom­up (or participatory) budgeting  o Middle and supervisory managers participate actively in the creation of the  budget  o Budgetary slack ­ occurs when middle managers set low budget goals to make  their jobs easier  Budget Components   Operating budgets  o Identify projected sales and production goals and the various costs the firm will  incur to meet these goals   Financial Budgets  o focus on the firm's financial goals and identify the resources needed to achieve  these goals   case budget   capital expenditure budget   budgeted balance sheet   Master budget o Represent the firm's overall plan of action for a specific time period  Comparison of Financial and Managerial Accounting  Financial Accounting Managerial Accounting Purpose •Provide information to external •Provide information to internal  stakeholders stakeholders •Information provided is  •Information provided is proprietary available to the general public • Type of information •Focuses almost exclusively on •Provides both financial and  presented financial information nonfinancial information Nature of reports •Prepares a standard set of  •Prepares customized reports to deal  financial statements with specific problems or issues Financial Accounting Managerial Accounting Timing of reports •Presents financial statements on a •Creates reports upon request by  predetermined schedule management •Quarterly or annually Adherence to  •Governed by a set of accepted  •Uses procedures developed  accounting  accounting principles internally standards Time period focus •Summarizes past performance  •Provides reports dealing with past and its impact on the firm’s present performance conditions •Involves making projections about the future when dealing with  planning issues Managerial Accounting and Accountants Concepts   Out of pocket costs  o Involve actual expenditures of money or other resources   Implicit costs o Costs incurred when the opportunity to use an asset in an alternative way is  given up  Fixed costs  o Do not change when the firm changes its level of production   Variable costs  o vary when the firm produces more of its goods and services   Direct costs  o Can be directly related to the production of the product   Indirect costs o Result of a firm's general operation   Activity­based costing (ABC) o Identifies activities that create and factors that derive indirect costs  o Ties cost drivers to the production of goods  Chapter 9 What types of assets do we need to achieve goals? How do we get the funds we need? • Evaluate financial performance • Plan financial resources • Manage working capital • Evaluate investment opportunities • Determine appropriate strategy Shareholder value and social responsibility:  • Historically, the goal of the firm has been to: Maximize the value of the firm to its owners • Publicly traded firms aim to maximize their stock price • The emphasis on shareholder value may seem to conflict with social responsibility • But, a long­term perspective can balance value with responsibility Risk and Return • Risk refers to the degree of uncertainty about a decision • Risk­return tradeoff suggests that high returns come from riskier investments  High returns but they expose the company to more risk • The Great Recession found many firms in serious trouble because of risk Financial Planning : Provide a Road Map for the Future  • What assets must be obtained? • How much additional financing is needed? • How much can the firm generate Internally?   Externally? • When will external financing be required? Personal Financial Planning  • If you save $286 per month at age 25, you will have a million dollars by age 65. • But, you would need to save $488 or $1,689 at ages 35 and 45 to reach that amount. • With an 8% return, planning to be a millionaire is very possible! • Financial planning starts with outlined goals for companies and individuals. Basic Planning Tools: Budgeted Financial Statement and Cash Budget   Budgeted Income Statement – forecasts the sales, expenses and net income  Budgeted Balance Sheet – forecasts the types and amounts of assets a firm will need  to carry out plans  Cash Budget – detailed projection of cash flows to determine when cash shortages and  surpluses will occur Managing Cash: Is it possible to have too much money?  • Need cash to pay workers, suppliers, creditors and taxes • Hold cash for contingency • Cash does not earn returns • Stockholders will want to know why cash is not being reinvested • Report cash equivalents as cash; liquid assets • Commercial Paper • T­Bills • Money Market Mutual Funds Managing Current Assets: Cash  Commercial Paper • Short­term unsecured promissory note (IOUs) • Issued by major corporations with excellent credit rating • Sold at a discount; price plus interest is paid when the paper comes due T­bills • Short­term IOUs issued by the U.S. government • Mature in 4, 13, or 26 weeks • Sold at a discount; face value is paid at maturity • Good market for T­Bills since they are backed by the government Money Market Mutual Funds • Pooled funds to purchase a portfolio of short­term, liquid securities • Affordable way for small investors to get into the market Managing Current Assets:  Accounts Receivable  Accounts Receivable ­ Money which is owed to a company by a customer for products and  services provided on credit.  Set Credit Terms   Establish Credit Standards   Design Appropriate Collection Policy  Managing Inventories  • Inventory:  finished goods, work­in­process, parts and materials • Customers are disappointed when they cannot find desired products on the shelves • The cost of storing, handling and insuring inventory is expensive • Companies aggressively manage inventories to reduce costs and improve efficiency Short Term Financing: Arranging for quick cash  • Spontaneous Financing Trade Credit • Short­Term Bank Loans Line of Credit Revolving Credit  • Factoring • Commercial Paper Capital Budgeting  • Replace machines and equipment • New machines and equipment • A new factory, warehouse or office • Introduce a new product line • Capital Budgeting: a systematic evaluation of a firm’s major long­run capital investment opportunities Evaluating Capital Budgeting Proposals: Time Value of Money  Managers must evaluate costs and benefits of investment that occur over a period of many  years. Time Value of Money – a dollar received today is worth more than a dollar received in the  future Compounding – earning interest in the current period on interest from previous periods Evaluating Capital Budgeting Proposals: Net Present Value  • Managers must compare the amount of cash an investment generates and when it  generates the cash • Time value of money – a dollar received today is worth more than a dollar received in  the future • Present Value – How much a given amount of cash received in a future period is worth  today, given the time value of money Choosing the sources of long­term capital: Loaners vs. Owners Capital Structure – The mix of equity and debt financing a firm uses for financial needs  Debt Financing – Creditors  Equity Financing – owners  Debt Financing  Advantages:  • Interest payments a firm makes on debts are a tax­deductible expense • Firm acquires additional funds without:  • Making stockholders invest more • Sale of stock to new investors Disadvantages •  Required interest payments: • Take up most of a firm’s earnings in a bad financial situation leading to  bankruptcy   • Covenants hamper a firm’s flexibility • Restrictions on dividends make it difficult for the firm to raise money Equity Financing  Advantages  • More flexible and less risky than debt financing • Does not impose: • Required payments • Covenants Disadvantages  • Does not yield tax benefits  • Existing owners might not want a firm to issue more stock • Firm forgoes the opportunity to use financial leverage  Chapter 10 ■ Financial markets: Transfer funds from savers to borrowers  ■ Depository institutions: Obtain funds by accepting checking and savings deposit and  lending those funds  Commercial banks   Credit unions   Savings and loan associations  ■ Nondepository financial institutions  Institutional investors: Amass financial capital and acquire a portfolio of  different assets  Securities brokers: Agents for investors who want to trade in financial securities  Securities dealers: Buy and sell stocks and bonds for their own account  Investment banks: Help firms issue new securities to raise financial capital Financial Markets: Key Laws and Impacts  Federal Reserve Act of 1913 • Created Federal Reserve System to serve as the central bank in the United States • Primary responsibility of overseeing the nation’s banking system Banking Act of 1933 • Or the Glass­Steagall Act established the Federal Deposit Insurance Corporation • Insured depositors against financial losses when a bank failed • Banned commercial banks from competing with nondepository institutions  Securities Act of 1933 • Dealt mainly with the process of issuing new securities • Required firms issuing new stock in a public offering to file a registration statement with  the SEC Securities Exchange Act of 1934 • Regulated the trading of previously issued securities • Securities and Exchange Commission: Oversee the securities industry Deregulation During the 1980’s and 1990’s  • Financial Services Modernization Act of 1999 • Reversed the Glass­Steagall Act’s prohibition of banks selling insurance or acting as investment banks • Known as the Gramm­Bliley­Leach Act Re­Regulation in the Aftermath of Financial Turmoil  Sarbanes­Oxley Act in 2002 • Ensured that external auditors offered fair opinions while examining a company’s  financial statements • SEC’s authority was increased to regulate financial markets Dodd­Frank Act of 2010 • Expanded the Fed’s regulatory authority over nondepository financial institutions • Established the Financial Stability Oversight Council to identify emerging risks  Securities Markets: An Overview  ■ Common stock: Basic form of ownership in a corporation  Voting rights  Right to dividends  Capital gains: Received when the price of the stock goes over the amount paid  for it  Preemptive right  Right to a residual claim on assets ■ Preferred stocks ­ Holders get preferential treatment   Claim on assets  Payment of dividends  Can be cumulative   Company’s stronger earnings do not ensure greater gains for the holder ■ Bonds ­ Formal IOU issued by a corporation or government entity  Maturity date: Date a bond comes due   Par value: Amount at maturity  Coupon rate: Annual interest payment as a percentage of the bond’s par value  Current yield: Bond’s interest payment as a percentage of the bond’s current  market price rather than its par value ■ Convertible securities ­ Shares of preferred stock that investors exchange for a number  of shares of the issuing corporation’s common stock  Conversion ratio ­ Number of common stock shares exchanged for each security ■ Financial diversification: Holding many different securities in different sectors Mutual Funds  • Close­end fund: Issues a fixed number of shares and invests the money received from  selling them in a portfolio of assets • Open­end mutual Fund: Issues additional shares when demand increases or redeems  old shares when investors cash in • Based on net asset value per share Exchange Traded Funds  ■ Allows investors to buy ownership in a market basket of many different securities  Market basket ­ Reflects the composition of a broad­based stock index Primaries Securities Market  ■ Corporations raise additional financial capital by selling newly issued securities ■ Public offering: Securities sold to the investing public  Initial public offering: First time a corporation sells its stock in a public offering   Underwrite: Investment bank purchases all the shares at a specified price  guaranteeing the firm new funds  Registration statement: Firm’s statement with the SEC on its financial  statements ■ Private placement: Securities sold to one or more accredited investors   Accredited investors: Individuals or other organizations that meet specific  financial requirements set by the SEC  Under terms negotiated between the issuing firm and the private investors Secondary Securities Markets  Stock Exchange  • Organized venue to trade listed stocks and securities • Market makers: Securities dealers who continuously buy and sell specific NASDAQ­ listed stocks with an ask­price and bid­price Over­the­counter­market  • Where securities that are not listed on exchanges are traded Electronic Communications Networks  • Entirely automated and computerized trading systems that allow traders to bypass the  market makers used in the NASDAQ and OTC markets Choosing a Broker  Full Service Broker  • Perform market research, investment advice, and tax planning Discount Brokers • Provide basic services needed to trade in securities • Offer fewer additional services Buying Securities  ■ Market orders: Instruct brokers to buy or sell a security at the current market price ■ Limit orders: Limits the prices at which orders are executed  Buy limit order ­ Buying at a specified value  Sell limit order ­ Selling at a specified value How to invest in securities? Investing for income •Focus on buying bonds and preferred stocks Market timing •Use of analytical techniques to predict fall/rise in prices of specific stocks Value investing •Find stocks that are undervalued in the market, to generate a capital gain Investing for growth   •Look for companies that have the potential to grow leading to a steady rise in price Buying and holding •Purchasing diversified securities and holding them for a long period of time Market Trends and Performance Tracking  ■ Stock index: Tracks prices of a large group of stocks that meet defined criteria  Dow Jones Industrial Average (DJIA): Adjusted average price of 30 stocks  picked by the editors of The Wall Street Journal  Standard & Poor’s 500: With 500 stocks it is a much broader index than the  DJIA ■ To check out a specific stock, type its stock symbol into a “Get Quote” box  Last trade ­ Price of firm’s common stock for the most recent trade   Change ­ Last trade of the firm’s stock  Bid and ask ­ Highest/lowest price currently offered to buy/sell the firm’s stock  Day’s range ­ Highest stock price during the day   Market Cap ­ Total market value of all shares   52­week range ­ Highest price for the stocks over the previous 52 weeks  Volume ­ Shares of the stock that have been traded in the current trading session  Price­to­earnings ratio ­ Divide the stock’s price per share by its earnings per  share  Earnings per share ­ Divide net income by the number of shares outstanding  Div and yield ­ Sum of dividends paid by the firm in the previous 12 months


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