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DREXEL / Business / BUSN 260 101 / What combines the promotional tools into one comprehensive strategy?

What combines the promotional tools into one comprehensive strategy?

What combines the promotional tools into one comprehensive strategy?

Description

School: Drexel University
Department: Business
Course: Foundations of Business
Professor: Eric rios
Term: Summer 2016
Tags:
Cost: 50
Name: BUSN 101 Final Exam Notes Chapters: 19, 17, 18, 16, 20, 9, and Bonus Chapter D
Description: Chapter 16: Using Effective Promotions Chapter 17: Chapter 18: Financial Management Chapter 19: Using Securities Markets for Financing and Investing Opportunities Chapter 20: Money, Financial Institutions and Federal Reserves Chapter 9: Production and Operations Management Chapter D: Managing Personal Finances
Uploaded: 02/08/2017
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Chapter 16 Lecture Notes: Using Effective Promotions ∙ Learning Objectives o Identify the new and traditional tools that makeup the  promotion mix o Contrast the advantages and disadvantages of various  advertising media, including the Internet and social media o Illustrate the steps of the B2B and B2C selling processes o Describe the role of public relations department, and show  how publicity fits in that role o Assess the effectiveness of various forms of sales  promotion, including sampling  o Show how word of mouth, viral marketing, blogging,  podcasting, e-mail marketing, and mobile marketing work ∙ Chris Hardwick: Nerdist Industries o Hardwick broke into entertainment after graduating from  UCLA o After his career hit a low, he started following his nerd  passions and created The Nerdist o Entered a partnership with Peter Levin and expanded the  Nerdist franchise.  ∙ Sony Experia: o This company put its product into the hands of Spiderman.  Viewers watched as the superhero used the product  throughout his latest movir.  ∙ Promotion in an Organization o Promotion Mix: The combination of promotional tools and organizational uses the traditional mix includes:  GET PIC ∙ Integrated Marketing Communication (IMC) o Integrated Marketing Communication (IMC)  Combines the promotional tools into one  comprehensive strategy. IMC is used to: ∙ Create a positive brand image ∙ Meet the needs of consumers ∙ Meet the strategic marketing and promotional  goals of the firm  ∙ Steps in a Promotional Campaign  o 1. Identify the target o 2. Define objectives o 3. Determine a promotional budget o 4. Devlope a unifying message  o 5. Implement the plan  o 6. Evaluate effectiveness∙ Classic Campaigns: Brilliant Marketing Ideas o GET PIC  ∙ Advertising in the Firm: o Advertising: Paid, non-personal communication through  various media by organizations and individuals who are in  some way identified in the message o Major goals of advertising:  Inform  Persuade   Remind ∙ Impact of Advertising o Total advertising expenditures exceed $215 billion yearly  o Consumers benefit because production costs of TV  programs, radio programs, newspapers and magazines are  paid for by advertisers o Marketers choose ad media that will reach the target  market ∙ Major Categories of Advertising o GET PIC ∙ Advertising Expenditures by Media in $ Millions o GET PIC ∙ Dear Mr. Postman…Steps in Launching Direct-Mail  Campaign  o 1. Plan: What should your mailing accomplish? o 2. Get the Right List: The better the list, the better your  chance of success o 3. Stand Out: Make your ad like no other o 4. Get Help: Contact a marketing firm with direct mail  experience o 5. Follow Up: One mailing is not enough  ∙ Popular Advertising Media o TV advertising is still the dominant media o Digital Video Recorders (DVRs) challenge TV advertising  because viewers can skip ads o Product Placement: Advertisers pay to put their products into TV shows and movies where the audience will see  them  ∙ Infomercials and Online Advertising o Infomercial: A full length TV program devoted exclusively  to promote a particular product o Online ads are attempts to get potential customers to a  web site to learn about a product o Interactive Promotion: Allows marketers to open a  dialogue between buyers and sellers and let them work  together to create a beneficial exchange ∙ Online Experience: How to Avoid Losing Customers Over a Bad Website o 1. Brand message is key o 2. Site must be easy to navigate o 3. Make sure calls to action are effective o 4. Users want fast, readable websites o 5. Users with disabilities should be able to navigate ∙ Social Scammers: How to Protect Yourself From Schemers o 1. Be wary of requests for money transfers—even from  friends’ accounts o 2. Be wary when you use applications. Don’t give  unnecessary information  o 3. Use URL expanders to see the full address of links on  friends’ pages ∙ What’s in Your Oreo? o To Americans, an Oreo is the same cookie we’ve been  enjoying for over 100 years. o But Kraft has taken Oreos global which has led to different  variations.  o In China they enjoy green tea Oreos while Argentina has  banana with dulce de leche.  ∙ Global Advertising o Requires marketers to develop a single product and  promotional strategy to implement worldwide o Problems can arise in global markets with using one  advertising campaign in all countries- especially bad  translations  Culturally sensitive advertising is key to  successful international marketing  ∙ Personal Selling o Personal Selling: The face-to-face presentation and  promotion of a product, including the salesperson’s search  for new products and follow up service o Salespeople need to listen to customer needs, help reach a solution and do everything possible to make the  transaction as simple as possible   Selling is about more than trying to convince  someone to buy a product; it is about listening to  the customer ∙ Steps in the Selling Process o 1. Prospect and qualify  o 2. Pre-approach  o 3. Approach  o 4. Make a presentation o 5. Answer objectionso 6. Close the sale   Trial Close: a statement or question that moves the process toward the purchase o 7. Follow up ∙ Prospecting and Qualifying in Selling o Prospecting: Researching potential buyers and choosing  those most likely to buy o Qualifying: Making sure customers have a need for a  product, the authority to buy and the willingness to listen  to a sales message o Prospect: A customer who meets the qualifying criteria  ∙ Buy This: successful selling strategies o Know your competition o Understand your customer’s business o Differentiate your product or service o Sell to the people most likely to buy o Build relationships o Put the right people in the right selling spots ∙ Whoops! Sales slip-ups o Not feeling the customer’s pain o Making money is the only goal o Seeing sales as just a job o Getting upset during the presentation o Failing to properly prepare or over-preparing  o Not being yourself o Neglecting the relationship ∙ Steps in the B2C Selling Process o GET PIC ∙ TEST PREP o What are the four traditional elements of the  promotion mix? o What are the three most important advertising  media in order of dollars spent? o What are the seven steps in the B2B selling  process? How does it differ from the B2C selling  process?  The four traditional elements of the promotion  mix include: advertising, personal selling,  public relations, and sales promotion.   The three most important advertising media in  order of dollar spent are: television, direct  mail, and digital.  The seven steps in the B2B selling process are: (1) prospecting and qualifying, (2) pre approach, (3) approach, (4) make presentation, (5) answer objections, (6) close  sale, and (7) follow-up. B2B differs from B2C in that the sales person does not have to do  much prospecting or qualifying.  ∙ Using Public Relations in Promotion o Public Relations (PR): Evaluates public attitudes,  changes in policies and procedures in response to the  public, and executes a program of action and information  to earn public understanding and acceptance o 3 steps of a good PR program:  1. Listen to the public  2. Change policies and procedures  3. Inform people you’re responsive to their needs ∙ Publicity o Publicity: any information about an individual, product or  organization that’s distributed to the public through the  media nad is not paid for or controlled by the seller o Advantages of Publicity  Free  Reaches people who would not look at an  advertisement  More believable than advertising  ∙ Disadvantages of Publicity o No control over whether the media will use a story or when they may release it  o It can be good or bad o Once a story has been run, it is not likely to run again  ∙ Sales Promotions o Sales Promotion: The promotional tool that stimulates  consumer purchasing and dealer interest by means of  short-term activities o Categories of Sale Promotions:  B2B Sales Promotions  Consumer Sales Promotions ∙ Sales Promotion Techniques o GET PIC ∙ Key Consumer Promotions o Coupons o Demonstrations o Sampling o Sweepstakes o In-store displays o Contests ∙ TEST PREPo What are the three steps in setting up a public  relations program? o What are the sales promotion techniques used to  reach consumers? o What sales promotion techniques are used to reach  businesses?  The three steps in a public relations program  include: (1) listen to the public, (2) develop  policies and procedures in the public interest,  and (3) tell people you’re being responsive to  their needs.   External sales promotions to consumers rely on samples, coupons, cents-off deals, displays,  store demonstrators, premiums, and other  incentives.   Internal sales promotion activities include  sales training, sales aids, audiovisual displays,  and trade shows.  ∙ Using Word-Of-Mouth Promotion o Word-of-Mouth-Promotion: People tell others about  products they have purchased o Word- Of- Mouth is important for products like:  Restaurants  Daycare and eldercare  Car repair shops  Hair stylists  Hotels ∙ What are Companies Yelping About> o Many companies have a website, Facebook page or some  online presence.  o However, on review sites like Yelp, they cannot control their public image.  o The Federal Trade Commission has received over 2,000  complaints about Yelp. o Companies can respond to reviews. But often the damage  is already done. ∙ Emerging Promotional Tools o Viral Marketing: Paying customers to say positive things  on the Internet or setting up multiple selling schemes  whereby consumers get commissions o People who promote through viral marketing often receive  SWAG which can include free tickets, shirts and other  merchandise ∙ Blogs, Podcasts and E-mails:o Blogs are a great way to interact with customers and  improve the company’s website ranking o Podcasting- A way to distribute multimedia files via the  internet o Email promotions increase brand awareness among  commercial suppliers ∙ Mobile Media o Marketers make use of smartphones to text customers  about product offers and other company information  ∙ Push, Pull and Pick Strategies: o Push Strategy: Producers use advertising, personal  selling, sales promotion and other tools to get their  products stocked on shelves o Pull Strategy: Directs heavy advertising and sales  promotions efforts towards consumers and gets the public  to request their products from retailers o Pick Economy: Refers to consumers who pick out their  products from online outlets ∙ TEST PREP o What’s viral marketing? o What are blogging and podcasting? o Describe a push strategy and a pull strategy.  Viral marketing is a broad term that describes  everything from paying customers to say  positive things online to setting up multilevel  selling schemes whereby consumers get  commissions for directing friends to specific  sites.   A blog is an online diary that allows the user to create and update with text, photos, or links to other sties. Podcasting is a means of  distributing audio and video programs online.   In a push strategy, the producer uses  advertising, personal selling, sales promotion,  and all other promotional tools to convince  wholesalers and retailers to stock and sell  merchandise. A pull strategy directs all  advertising and sales promotion toward the  consumer.Bonus Chapter D: Managing Personal Finances ∙ Learning Objectives o Outline the six steps for controlling your assets. o Explain how to build a financial base, including investing in  real estate, saving money, and managing credit. o Explain how buying the appropriate insurance can protect  your financial base. o Outline a strategy for retiring with enough money to last a  lifetime. ∙ Six Steps to Control Your Finances o 1. Take an inventory of your financial assets o 2. Keep track of all your expenses o 3. Prepare a budget o 4. Pay off your debts o 5. Start a savings plan o 6. Borrow only to buy assets that increase in value ∙ Managing Your Household Budget o A household budget includes  Mortgage or rent  Food and clothing  Vehicles and furniture  Insurance needs  Other expenses ∙ How Money Grows∙ Easy-ish budget cuts o Cut back on gourmet groceries and use coupons o Cut down on your cell phone bill  o Cut out the cable television  o Cut down on nights out  o Cut the clutter in your house ∙ Building Your Financial Base o Live frugally. If married, try to live on one income.  o Your first major investment might be a low-priced home  o Buy for the long term and don’t live beyond your means  ∙ Five Rules of Frugality o 1. Don’t give up what you love o 2. Find inexpensive forms of entertainment  o 3. Cut back on non-crucial things o 4. Never go shopping without knowing exactly what you’re  buying  o 5. Shop around for good deals! ∙ Financial benefits of buying a home  o A home is an investment you can live in  o Paying for a home is a good way of forcing yourself to save  o Interest paid on your home loan is a tax deductible o Three keys to optimal return on your home are: location,  location, location  ∙ How much house can u afford?∙ Saving and Managing Credit o Contrarian Approach : buying stock whenever everyone else is selling or vice versa o Credit cards serve useful purposes and are important to  own but must be used discriminately  o Not all credit cards are equal ∙ Credit cards and Debt o 50% of college students have four or more credit cards o only 17% report paying off their balance each month  o If you feel managing a credit card would be too difficult, try a debit card ∙ Credit Card Act of 2009 o Created a new consumer credit card protections and went  into effect February 2010 o New law allows card issuers to increase interest rates for  only a limited number of reasons o People must be over 21 or have an adult cosign to get a  credit card ∙ Clean Credit o 1. Always pay your bills on time! o 2. Keep small balances on multiple cards o 3. Don’t shift balances o 4. Don’t apply for too many cards at once o 5. Don’t file for bankruptcy ∙ What’s your score? 760-850 -> Excellent 700-759 -> Great 660-690 -> Fair  620-659 -> Poor 619 and under -> Very Poor ∙ TEST PREP o What are the six steps you can take to control your  finances? o What steps should a person follow to build capital? o Why is real estate a good investment?  The six steps you can take to control your  finances are: (1) Take an inventory of your  financial assets, (2) keep track of all your  expenses, (3) prepare a budget, (4) pay off  your debts, (5) start a savings plan, and (6)  borrow only to buy assets that increase in  value or generate income.   2. The steps a person should follow to build  capital are: Find a job, create a budget, and  live frugally. Warren Buffet became one of the  worlds richest people but still lives in the  house he purchased in the 1950s! Invest the  money you save to generate more capital.    3. Historically real estate has been a sound  investment. It is the only investment you can  live in. Also, the payments are fixed with the  exception of taxes and utilities. As your  income increases, the house payments get  easier to make, while rent tends to increase  overtime.  ∙ Insuring your life o Term Insurance: a pure insurance protection for a given  number of years that typically costs less the younger you  buy it  o Whole Life Insurance: Combines pure insurance with  savings, so you buy both insurance and a savings plan  o Variable Life Insurance: A form of whole life insurance  that invests the cash value of the policy in stocks or other  high- yielding securities ∙ Purchasing Annuities o Annuity: a contract to make regular payments to a person for life or for a fixed period; an annuity guarantees an  income until you die.   Two types of annuities: ∙ Fixed Annuities ∙ Variable Annuities ∙ Disability Insurance: Inusrance that pays part of the cost of a  long-term sickness or an accident  ∙ Homeowner’s/Renter’s Insurance: covers the cost of things  you own if they are destroyed ∙ Umbrella policy: Combining all your insurance (life, health,  homeowner’s auto) from one company is less costly ∙ What to know about health savings accounts o 1. Your employer is likely to offer HSA options o 2. The plans can be costly but withdrawal for medical bills  is tax-free o 3. They’re not for everyone  o 4. HSA accounts can double as retirement accounts∙ Social Security: the Old-Age, Survivors and Disability insurance programs established by the social security act of 1935 o SS benefits are paid through social security taxes paid by  workers currently earning wages in the market o SS fund is expected to be hard pressed because of the  growing number of older adults ∙ Individual Retirement Accounts (IRA’s): Tax deferred  investment plans that enable a person to save part of their  income for retirement ∙ Tax-Deferred Contributions: Contributions in which you pay  no current taxes, but earnings gained in the IRA are taxed as  income after withdrawals ∙ Roth IRA: Does not give an up front tax deduction but earnings  grow tax free and are tax-free when they are withdrawn  ∙ MyIRA: New Roth IRA-type retirement savings plan for low and  middle income individuals ∙ 401 K plan: An employee sponsored savings plan that allows  you to deposit a set amount of pretax dollars and collect  compounded earnings tax free until withdrawal  ∙ Three Benefits of 401 (K) Plans o 1. Contributions reduce your present taxable income  o 2. Tax is deferred on the earnings  o 3. Many employers will match your contributions ∙ Keogh Plans: allows self-employed people to establish their  own retirement plans o Like IRAs for entrepreneurs o Can be withdrawn in a lump sum or spread out over years ∙ Will: A document that names the guardian for minor children,  states how you want your assets distributed and names the  executor for your estate ∙ Executor: a person who assembles and values your estate, files  income and other taxes, and distributes assets ∙ TEST PREP o What are three advantages of using a credit card? o What kind of life insurance is recommended for  most people? o What are the advantages of investing through an  IRA? A Keogh account? A 401(k) account? o What are the main steps in estate planning?  Three advantages of using a credit card are:  (1) You may have to have a credit card to buy  certain goods or rent a car, (2) credit cards  allow you to easily track your expenses, and (3) they are more convenient than carrying  cash or writing checks.   2. Term insurance is often recommended for  most people, since it is cheaper than whole  life.   3. The primary advantage of an IRA and Keogh  is that the money invested is not taxed until it  is withdrawn. A Keogh plan is like an IRA for  the self-employed. While the current IRA  contribution limit is $5,500, it increases each  year in line with inflation. An additional $1,000 can be added if you are over the age of 50.   4. The main steps in estate planning are: (1)  Choose a guardian for your children, (2)  prepare a will, and (3) assign an executor for  your estate. It is also important to sign a  durable power of attorney to enable someone  else to handle your finances in the event you  are not able to do so. Chapter 18 Lecture Notes: FINANCIAL MANAGEMENT:  ∙ Learning Objectives o 1. Explain the role and responsibilities of financial managers o 2. Outline the financial planning process, and explain the three key  budgets in the financial plan o 3. Explain why firms need operating funds o 4. ID and describe different sources of short term financing o 5. ID and describe different sources of long term financing  ∙ Sabrina Simmons (GAP) o Simmons earned her bachelor’s in finance at UC- Berkeley and her MBA at UCLA o Joined GAP as a treasurer in 2001, balanced the books, and eliminated  the reliance on risky investments o Encourages GAP to not be afraid to create new brands, even after  failure ∙ NAME THAT COMPANY  o This company spends over $6 billion a year on research to develop  new products even though it may take as long as ten years before the  products are approved and introduced to the market. Since long-term  funding is very critical in our business, high-level managers are very  involved in the finance decisions. ∙ What is Finance? o Finance: the function in a business that acquires funds for a firm and  managers them within a firm  o Finance activities include:  Preparing budgets  Creating cash flow analysis  Planning for expenditures ∙ Financial Management o FM: the job of managing a firm’s resources to meet its goals and  objectives ∙ Financial Managers o FM: examine financial data and recommend strategies for improving  financial performance  Responsible for: ∙ Paying company bills ∙ Collecting payments ∙ Staying abreast of market changes ∙ Assuring accounting accuracy  ∙ Who’s Who in Finance: o CFO: Chief Financial Officer o CFP: Certified Financial Planner o CFA: Chartered Financial Analyst o Comptroller: Chief Accounting Officer ∙ Four Signs You Need a CFO o 1. You do not have information on key items like cash flow, working  capital, or forecasts.o 2. No one is carefully watching and analyzing your expenses.  o 3. You are not aware of regulatory changes that could affect your  business. o 4. You are unable to generate financial reports. ∙ What Financial Managers Do o GET PIC ∙ What Worries Financial Managers o Consumer demand for their firm’s products o Credit markets and interest rates o Financial regulations from the government  o Volatility of the dollar o Foreign Competition  o Environmental regulations ∙ Why do Firms Fail Financially? o 1. Undercapitalization o 2. Poor control over cash flow  o 3. Inadequate expense control  ∙ Top Financial Concerns of Company CFO’s-MACRO  o Consumer demand  o Federal-government policies o Price pressure from competitors o Credit markes/interest rates o Global financial instability  o Ability to maintain margins o Ability to forecast results maintaining morale/productivity  o Cost of healthcare o Working-capital management ∙ Financial planning o Involves analyzing short-term and long-term money flows to and from  the company o Three key steps of financial planning  1. Forecasting the firm’s short-term and long-term financial  needs  Developing budgets to meet those needs  Establishing financial controls to see if the company is achieving  its goals ∙ Financial Forecasting o Short-term Forecast: predicts revenues, costs and expenses for a  period of one year or less o Cash-flow Forecast: predicts the cash inflows and outflows in future  periods, usually months or quarters o Long-term Forecast: predicts revenues, costs, and expenses for a  period longer than one year and sometimes as long as five or ten years ∙ Budgeting  o Budget: sets forth management’s expectations for revenues and  allocates the use of specific resources throughout the firm  Depend heavily on the balance sheet, income statement,  statement of cash flows and short-term and long-term financial  forecasts  The guide for financial operations and expected financial needs ∙ Types of Budgets o Capital Budget: Highlights a firm’s spending plans for major asset  purchases that often require large sums of money  o Cash Budget: Estimates cash inflows and outflows during a particular  period like a month or quarter o Operating (Master) Budget: ties together all the firm’s other  budgets and summarizes its propsed financial activities ∙ Financial Planning o GET PICS ∙ Establishing Financial Control o Financial Control: a process in which a firm periodically compares its  actual revenues, costs and expenses with its budget ∙ Factors Used in Assessing Financial Control  o Is the firm meeting its short-term financial commitments? o Is the firm producing adequate operating profits on its assets? o How is the firm financing its assets? o Are the firms owners receiving an acceptable return on their  investment? ∙ TEST PREP o Name three finance functions important to the firm’s overall operations and performance. o What three primary financial problems cause firms to fail? o How do short-term and long-term financial forecasts differ? o What’s the purpose of preparing budgets? Can you identify three  different types of budgets?  The three finance functions are: financial planning, budgeting,  and the establishment of financial control.   The three primary financial problems causing firms to fail are:  undercapitalization, poor control of cash flow, and inadequate  expense control.  Short-term forecasts attempt to project revenue, costs, and  expenses for a period of one year or less, while long-term  forecasts are for a period greater than one year.   A budget sets forth management’s expectations for revenues  and becomes the organization’s primary guide for the financial  operations as well as expected financial needs. The three types  of budgets are: capital, cash, and operating.  ∙ Key Needs for Operational Funds in a Firm  o Managing day-by-day needs of the business o Controlling Credit operations o Acquiring needed inventory  o Making Capital expenditures ∙ How Small Businesses Can Improve Cash Flow o Be more aggressive in collecting accounts receivable.o Offer customers discounts for paying early. o Take advantage of special payment terms from vendors. o Raise prices. o Use credit cards discriminately.  ∙ Good Finance or Bad Medicine? o You are a new hospital administrator at a small hospital that, like many others, is experiencing financial problems. o You suggest discontinuing the hospital’s large stockpile of drugs and  shift to ordering them just when they are needed.  o Some like the idea, but the doctors claim you are sacrificing patients’  well-being for cash. What do you do? What could be the result of your  decision? ∙ Using Alternative Sources of Funds o Debt Financing: the funds raised through various forms of borrowing  that must be repaid o Equity Financing: the funds raised from within the firm from  operations or through the sale of ownership in the firm (such as stock) ∙ Short and Long-term Financing o Short-term Financing: funds needed for a year or less o Long-term Financing: Funds need for more than a year ∙ Why Firms Need Financing o GET PIC ∙ TEST PREP o Money has time value. What does this mean? o Why is accounts receivable a financial concern of the firm? o What’s the primary reason an organization spends a good deal of its  available funds on inventory and capital expenditures?  o What’s the difference between debt and equity financing?   Time value of money means money can grow over time through  interest earned.  Providing credit to customers is often necessary to keep current  customers happy and to attract new customers. The problem  with selling on credit is that as much as 25 percent of the firm’s  assets could be tied up in accounts receivable. This forces the  business to use it own funds to pay for goods or services sold to  customers who bought on credit.   To attract customers a firm must purchase inventory as well as  invest in tangible long-term assets such as land, buildings, and  equipment, or intangible assets such as patents, trademarks,  and copyrights.   The primary difference between debt and equity financing is  that debt must be repaid at maturity, while there is no obligation to repay equity financing. Interest must be paid on debt while  the company is under no obligation to issue dividends on equity  financing. The interest paid is tax deductible while dividends are not. Finally, debt holders do not have the right to vote on  company matters as equity holders do.  ∙ Types of Short-term Financingo Trade Credit: The practice of buying goods or services now and  paying for them later o Businesses often get terms such as 2/10 net 30 when receiving trade  credit  o Promissory Note: a written contract agreeing to pay a supplier a  specific sum of money at a definite time o Many small firms obtain short-term financing friends and family o If asking for help from family or friends, it’s important both parties:  1. Agree to specific loan terms  2. Put the agreement in writing  3. Arrange for repayment the same way they would for a bank  loan ∙ Difficulty of Obtaining Short-term Financing o Banks generally prefer to lend short-term money to larger, more  established businesses. o The recent financial crisis has made it difficult for even promising and  well-organized businesses to get loans. ∙ Threading the Financial Needle o Started thredUP with classmates while studying for his MBA at Harvard. o Launched the company in 2009 as a way to buy and sell adult clothing. o Transitioned into children’s clothes. o The company continues to attract huge investments to further improve the site.  ∙ Different Forms of Short-term loans o Commercial banks offer short-term loans like:  Secured Loans -- Backed by collateral.  Unsecured Loans -- Don’t require collateral from the borrower.  Line of Credit -- A given amount of money the bank will  provide so long as the funds are available.  Revolving Credit Agreement -- A line of credit that’s  guaranteed but comes with a fee. ∙ Factoring o Factoring: the process of selling accounts receivable for cash  o Factors charge more than banks, but many small businesses don’t  qualify for loans ∙ Commercial Paper o Commercial Paper: Unsecured promissory notes in amounts of  $100,000 + that income due in 270 days or less o Since commercial paper is unsecured, only financially stable in firms  are able to sell it  ∙ Credit Cards o Rates for small businesses grew almost 30% after The Credit Card  Responsibility Accountability and Disclosure Act was passed. o Credit cards are convenient but costly for a small business ∙ Ways to Raise Start-Up Capital o Seek out a microloan from a microlender o Use asset-based lending or factoring o Turn to the web and seek out peer-to-peer lendingo Research local banks o Sweet-talk vendors you want to do business with ∙ How Companies Fail to Raise Capital o 1. There is no formalized business plan to show need o 2. The company does not know how much to request from a lender o 3. Poor Credit o 4. Management is unrealistic about growth  ∙ TEST PREP o What does an invoice containing the terms 2/10, net 30 mean? o What is the difference between trade credit and a line of credit? o What is the key difference between a secured and an unsecured loan? o What is factoring? What are some of the considerations factors  consider in establishing their discount rate?  2/10 net 30 means a firm can receive a 2% discount if the bill is  paid within 10 days. If they choose not to take the discount, the  net amount is due in 30 days.  Trade credit is buying goods and services now and paying for  them later, while a line of credit is a given amount of unsecured  short term funds a bank will lend a business, provided the funds  are readily available.  A secured loan requires collateral, while an unsecured loan  doesn’t not.  Factoring is the process of sell accounts receivable for cash.  Things to consider in establishing the discount rate are: age of  the accounts receivable, the nature of the business, and the  condition of the economy. ∙ Setting Long-Term Financing Objectives o Three questions of financial managers in setting long-term financing  objectives:  1. What are the organization’s long-term goals and objectives?  2. What funds do we need to achieve the firm’s long-term goals  and objectives?  3. What sources of long-term funding (capital) are available, and which will best fit our needs? ∙ The Five C’s of Credit o 1. The character of the borrow o 2. The borrowers’ capacity to repay the loan  o 3. The capital being invested in the business by the borrower o 4. The conditions of the economy and the firm’s industry  o 5. The collateral the borrower has available to secure the loan  ∙ Are They Heroes or Hustlers? o Rich nations place their excess incomes into sovereign wealth funds  (SWFs). o SWFs are hailed as heroes when billions are invested in distressed  companies. However, some grow concerned with the presence of  foreign governments. o Much of that concern seems to be unfounded because of investigations by the U.S. government.∙ Using Long-Term Debt Financing o Long-term financing loans generally come due within 3-7 years but may extend to 15 or 20 years o Term-Loan Agreement: a promissory note that requires the borrower to repay the loan with interest in specified monthly or annual installments o A major advantage of debt financing is the interest of the firm pays is tax deductible  ∙ Using debt financing by Issuing bonds o Indenture terms: the terms of agreement in a bond issue o Secured bond: a bond issued with some form of collateral (i.e. real estate) o Unsecured (Debenture) Bond: a bond backed only by the reputation of the issuing company  ∙ Securing Equity Financing  o A company can secure equity financing by:  Selling shares of stock in the company.  Earning profits and using the retained earnings as reinvestments in the firm.  Attracting Venture Capital -- Money that is invested in new or emerging companies that some investors believe have great profit potential ∙ Want to Attract a Venture Capitalist? o 1. Can the company grow? o 2. Will we get our money back and more? o 3. Will it be worth our money and effort? ∙ Differences Between Debt and Equity Financing  o GET PIC  ∙ Using Leverage for Funding Needs o Leverage: Raising funds through borrowing to increase the firm’s rate of return  o Cost of Capital: The rate of return a company must earn in order to meet the demands of its lenders and expectations of equity holders ∙ Using Debt vs. Equity Financing: o GET PIC ∙ Lessons Learned from the Recent Financial Crisis o The recent financial crisis was the worst fall since the Great Depression. o Led to the passage of sweeping financial reform. o Government is increasing involvement and intervention. ∙ TEST PREP  o What are the two major forms of debt financing available to a firm? o How does debt financing differ from equity financing? o What are the three major forms of equity financing available to a firm? o What is leverage, and why do firms choose to use it?  A company could issue and sell bonds or they could borrow from financial institutions and individuals.  The primary difference between debt financing and equity financing is that debt must be repaid at maturity while there is no obligation to repay equity financing. Interest must be paid on debt, while the company is under no obligation to issue dividends on equity financing. The interest paid is tax deductible, while dividends are not. Finally, debt holders do not have the right to vote on company matters, while equity holders usually do have voting rights.   A business can obtain equity financing from the sale of company stock, from retained earnings, or from venture capital firms.   Leverage is borrowing funds to invest in expansion, major asset purchases, or research and development. Firms use leverage in an effort to increase the firm’s profit. Chapter 17 In Class Lecture Notes: ∙ What is accounting? o Financial accounting: outside the company; what are the sales etc.  what did we make? How much are our assets? They will given an  opinion; look over books and records and if they are not correct they  are sued; what you report to the outside world o Managerial accounting: inside; what is going on’; how did we get to  that profit or loss? How you run the company within ∙ Total Assets= Total Liabilities (how much I owe) + Owners Equity (net worth) ∙ TA= TL+OE ∙ TA-TL= OE ∙ OE: Common stock and Retained Earnings o How much money we put into the business when we started it o Earnings Retained: how much money did we hold onto ∙ ALICE: o A: assets o L: liabilities o I: income o C: capital o E: expenses o BS: Balance Statement/sheet  o IS:Income Statement ∙ When you fill up gas you have a decrease in assets and increase in expenses ∙ Asset: cash, inventory, equipment, goodwill: things we have today, tomorrow  and the next day  ∙ Liabilities: anything you owe today, tomo, and the next day  ∙ Income: revenue; sales, rental income, interest income; all income accounts ∙ Expenses: cost of doing business; computer expense, car expenses ∙ Revenue accounts are temporary ∙ Expense accounts are temporary  ∙ Capital: synonymous with OE and Net worth  o Common stock: when you buy shares of a company;  ∙ Balance Sheet tells you what else?*** o How liquid you are o How able you are to pay your current bills Chapter 17 In Class Lecture Notes: Understanding Accounting and Financial Information  ∙     Learning Objectives o Demonstrate the role that accounting and financial information play for a business and its stakeholders o Identify the different disciplines within the accounting profession o List the steps in the accounting cycle, distinguish between accounting  and bookkeeping, and explain how computers are used in accounting  o Explain how the major financial statements differo Demonstrate the application of ratio analysis in reporting financial  information  ∙     John Raftery: Patriot Contractors o Served in the Marines and used is G.I. Bill to study accounting  o Completed an entrepreneurship program for veterans and launched  Patriot Contractors o He credits his knowledge of accounting with the growth of his business ∙     What’s Accounting? o Accounting: Recording, classifying, summarizing and interpreting of  financial events and transactions in an organization to provide  interested parties needed financial information  o Outside parties- like employees, owners, creditors, unions, investors  and the government- make use of a firm’s accounting information ∙     The Accounting System  ∙     Accountant’s Responsibilities∙     M a nagerial Accounting  o Managerial Accounting: Provides information and analysis to  managers inside the organization to assist them in decision making   Involved with: ∙     costs of production ∙     Costs of marketing  ∙     Preparation and control budgets ∙     Minimizing tax liabilities ∙     Users of Accounting Information  ∙     Financial Accounting o Financial Accounting: Financial information and analyses are  generated for people primarily outside the organization. Outside users  are interested in these questsions:  Is the organization profitable? Is it able to pay its bills?  How much debt does it owe? o Annual Report—A yearly statement of the financial condition,  progress, and expectations of the firm  ∙     How to read an Annual Report o Key things to watch for and read:   Management’s discussion and analysis of operations  Balance Sheet  Income statement   Statement of cash flows  Auditor’s opinion  ∙     Public vs. Private Accountants o Private Accountants: Work in a single firm, government agency, or  non profit organization  o Public Accountants: Provide accounting services to individuals or  businesses o Certified Public Accountants (CPAs): Accountants who have passed a series of examinations established by the American Institute of  Certified Public Accountants (AICPA) and met a states requirements for  education and experience ∙     Ways to Improve Accounting Practices ∙     Dodd-Frank Act o Dodd-Frank Wall Street Reform and Consumer Protection Act increased  financial regulation by increasing the power of the Public Company  Accounting Oversight Board o Act was brought on by the recent financial crisis ∙     Auditing Checks Accuracy o Auditing: Reviewing and evaluating the information used to prepapre  a company’s financial statementso Independent Audit: An evaluation and unbiased opinion about the  accuracy of a company’s financial statements o Certified Internal Auditors (CIAs): Accountants who have a  bachelor’s degree and two years of experience in internal auditing and  pass an exam administered by the Institute of Internal Auditors ∙     Elementary, Mr. Auditor, Elementary o Fraud damages businesses, no matter what the size o The SEC has committed itself to fighting fraud but not all auditors and  CPAs are trained in finding fraud  o Colleges are offering advanced degrees in forensic accounting to meet  the upcoming demand for these accountants ∙     Specialized Accountants o Tax Accountants: Accountants trained in tax law and are responsible  for preparing tax returns to developing tax strategies o Government and Not-for- Profit Accounting : Support for  organizations whose purpose is not generating profit, but serving  others according to a duly approved budget ∙     TEST PREP o What’s the key difference between managerial and financial  accounting? o How’s the job of a private accountant different from that of a  public accountant? o What’s the job of an auditor? What’s an independent audit?  Managerial accounting provides information and analysis to the managers inside the organization and helps them  make better informed decisions. Managerial accounting  is concerned with measuring and reporting cost of  production, marketing, and other functions such as  preparing budgets; making sure business units stay  within their budgets and designing strategies to  minimize taxes. Financial accounting differs from  managerial accounting in that financial accounting  generates information for people primarily outside the  organization.  The private accountant works for a single firm,  government agency, or nonprofit organization. While  public accountants work for accounting firms that  provide accounting services for a fee. Public accountants provide services to individuals or businesses that include designing an accounting system, selection of software to  run the accounting system. and analyzing an  organization’s financial performance.   Auditors are responsible for examining the financial  health of the organization as well as looking into the  operational effectiveness and efficiencies of the  organization. An independent audit is an audit  conducted by public accounts who provide an evaluation and unbiased opinion about the accuracy of a company’s  financial statements. ∙     The Accounting Cycle o Accounting Cycle: A six-step procedure that results in the  preparation and analysis of the major financial statements ∙ Bookkeepers’ Role: o Bookkeeping: The recording of business transactions. Bookkeepers  divide a firm’s transactions into meaningful categories and post them  into a record book or computer program called a journal o Double-Entry Bookkeeping: Bookkeepers record all transactions in  two places so they can check one list of transactions against the other  for accuracy  ∙     Bookkeeper’s Tools o Ledger: A specialized accounting book or program where all  information is in one place o Trial Balance: a summary of all the information in the account ledgers ∙     Technology and Accounting o Computerized accounting programs post information instantly and  from remote locations o Intuit’s Quickbooks address the specific needs of small businesses ∙     TEST PREP o How is the job of the bookkeeper different from an accountant? o What’s the purpose of accounting journals and a ledger? o Why does a bookkeeper prepare a trial balance? o How has computer software helped businesses in maintaining  and compiling accounting information?  A bookkeeper classifies and summarizes the firm’s  financial data; while accountants interpret the data,  prepare financial statements, and report the information  to management.  The purpose of accounting journal is to divide the firm’s  transactions into meaningful categories to keep  information organized and manageable. A ledger transfers information from an accounting journal so  managers can find information about a single account in  one place.  A bookkeeper prepares a trial balance to ensure the  figures in the account ledgers are correct and balanced.  Computer software post information from journals  instantaneously even from remote locations so financial  information is readily available whenever the  organization needs it. ∙     Financial Statements  o Financial Statement: A summary of all the financial transactions that have occurred over a particular period o Key financial statements of business are:  Balance sheet  Income statement  Statement of cash flow ∙     The Fundamental Accounting Equation o Fundamental Accounting Equation: The basis for the balance sheet o The equation must always be balanced and includes the formula:  Assets=Liabilities+Owners Equity  ∙     Balance Sheet o Balance Sheet: The financial statement that reports a firm’s financial  condition at a specific time  ∙     Assets o Assets: Economic resources owned by a firm. Items can be tangible or intangible  o Liquidity: Ease with which assets can be converted into cash  ∙     Classifying Assets o Current Assets: Items that can or will be converted to cash within  one year o Fixed Assets: Long-term assets that are relatively permanent such as land, buildings or equipment  o Intangible Assets: Long-term assets that have no physical form but  do have value such as patents, trademarks and goodwill ∙     Classifying Liabilities o Liabilities: What the business owes to others-its debts o Accounts Payable: Current liabilities a firm owes for merchandise or  services purchased on credit o Notes Payable: short or long-term liabilities a business promises to  pay by a certain date o Bonds Payable: Long term liabilities that the firm must pay back ∙     Owners Equity: the amount of the business that belongs to the owner  minus any liabilities of the owners ∙     Retained Earnings: Accumulated earnings from the firm’s profitable  operations that are reinvested in the business∙     TEST PREP o What do we call the formula for the balance sheet? What three  accounts does it include? o What does it mean to list assets according to liquidity? o What is the difference between long-term and short-term  liabilities on the balance sheet? o What is owners’ equity and how is it determined?  The formula for the balance sheet is referred to as the  fundamental accounting equation. This equation  includes the following three accounts: assets, liabilities  and owners equity.   Assets on the balance sheet are listed according to how  quickly they can be converted to cash. Therefore, as you move down the balance sheet it becomes more difficult  to convert the assets into “liquid” cash.   Liabilities are what the business owes to others. The  liability account is divided into current and long-term  liabilities. Common liability accounts include: accounts  payable, notes payable and bonds payable.   Owners’ equity is the amount of the business that  belongs to the owners, minus any liabilities the business  owes. The formula for owners’ equity is assets minus  liabilities.  ∙     Income Statement: The financial statement that shows a firm’s bottom line that is, its profit after costs, expenses and taxes ∙     Net Income/Net Loss: The revenue left over after costs and expenses ∙     Formula for the INCOME STATEMENT: o The formula for the income statement: o Revenue o Cost of Goods Sold o = Gross Profit o Operating Expenses o = Net Income before Taxes o Taxes o = Net Income or Net Loss ∙     Revenue: the monetary value a firm received for goods sold, services  rendered or other payments ∙     Costs of Goods Sold (or Manufactured): Measures the cost of  merchandise the firm sells or the cost of raw materials and supplies it used in producing items for resale  ∙     Gross Profit (Gross Margin) : How much a firm earned by buying (or  making) and selling merchandise ∙     Generally Accepted Accounting Principles (GAAP): sometimes permits  accountants to use different method of accounting for inventory  ∙     FIFO: First in, First Out ∙     LIFO: Last in, First Out∙     Operating Expenses: Cost involved in operating a business, such as rent,  salaries and supplies ∙     Depreciation: The Systematic write-off of the cost of a tangible asset over  its estimate useful life ∙     Statement of Cash Flow: reports cash receipts and cash disbursements  related to the three major activities of a firm o 1. Operations  o 2. Investments o 3. Financing  ∙     Cash Flow: The difference between cash coming in and cash coming out  o Managing cash flow is a key consideration of a business and can be  particularly challenging for a small and seasonal business ∙     TEST PREP o What are the key steps in preparing an income statement? o What’s the difference between revenue and income on the  income statement? o Why is the statement of cash flows important in evaluating a  firm’s operations?  The key steps in preparing an income statement are:   Revenue  Cost of Goods Sold  = Gross Profit  Operating Expenses  = Net Income before Taxes  Taxes  = Net Income or Net Loss  2. Revenue is the monetary value of what a firm receives  for goods sold, services rendered, and other payments  such as rent. Income refers to the bottom line which is  the net income (or perhaps net loss) the firm incurs from  revenue minus sales returns, costs, expenses, and taxes  over a period of time.  3. The statement of cash flows is important because it  answers such questions as: How much cash came into  the business from current operations? Did the firm use  cash to buy stocks, bonds, or other investments? Did it  sell some investments that brought in cash? ∙     Ratio Analysis: The assessment of a firm’s financial condition using  calculations and financial ratios developed from the firm’s financial  statements o Key Ratios:  Liquidity ratios  Leverage ratios  Performance ratios  Activity ratios ∙     Liquidity Ratios: measure a firm’s ability to turn assets into cash to pay its  short term debtso Two Key Ratios: Current and Asset o *** Found in firm’s balance sheet ∙     Leverage Ratios: measure the degree to which a firm relies on borrowed  funds in its operations o Key Ratios: Debt to Owners Ratio o *** Found in firm’s balance sheet ∙     Profitability Ratios: measure how effectively a firm’s managers are using  the firm’s various resources to achieve profits o Key Ratios: Basic earnings per share, returns on sales and return on  equity  o ****Found on firm’s balance sheet and income statement  ∙     Activity Ratios: measure how effectively management is turning over  inventory  o Key Ratios: Inventory turnover ratio o ****Found on firm’s balance sheet and income statement  ∙     Timeline for the MOVE to IFRS o IFRS:International Financial Reporting Standards: o 2008: SEC offered proposed timeline o 2009: 110 large companies had the option of using IFRS o 2012: SEC assessed progress of IFRS o 2013: Final decision on the move to IFRS o 2015: Large public companies will be required to report in IFRS (pending SEC decision) o 2016: All companies will be required to report in IFRS (pending SEC decision) ∙     TEST PREP o What’s the primary purpose of performing ratio analysis using  the firm’s financial statements? o What are the four main categories of financial ratios?  Ratio analysis is the assessment of a firm’s financial  condition, using calculations and financial ratios.  Financial ratios are especially useful in comparing the  company’s performance to its financial objectives and to  the performance of others in the industry.   The four main categories of financial ratios are: liquidity, leverage, profitability and activity. Chapter 9: Production and Operations Management: ∙ Learning Objectives: o Describe the current state of the U.S. manufacturing and  what manufacturers have done to become more  competitive.  o Describe the evolution from production to operations  management o Identify various production processes and describe  techniques that improve productivity, including computer aided deisgn and manufacturing, flexible manufacturing,  lean manufacturing and mass customization  o Describe operations management planning issues including facility location, facility layout, materials requirement  planning, purchasing, just-in-time inventory control and  quality control o Explain the use of PERT and Gantt charts to control  manufacturing processes ∙ Manufacturing in the US o Some areas in the US are experiencing economic growth  while others are declining o Manufacturing in the US is so productive fewer workers are  needed ∙ ∙ What’s Made in the USA?∙ Massive Manufacturers: Top 10 US Manufacturers ∙ Top Paying Service Jobs o The US economy is no longer manufacturing based o 85% of jobs are in the service sector o The top-paying service jobs in the USA are: Legal services  Medical services  Entertainment  Accounting  Finance  Management consulting ∙ Remaining competitive in global markets o US is still the leader in nanotechnology and biotechnology o How can US businesses maintain a competitive edge?  Focusing on customers  Maintaining close relationships with suppliers  Practicing continuous improvement  Focusing on quality   Saving costs on through site selection  Relying on the internet to unite companies  Adopting new production techniques ∙ Nobody does it Better o Germanys’ economy is the most powerful and respected  economy in Europe o Mittlestand companies design their own machinery and  production processes o China has purchased many German firms and are studying  their production techniques ∙ Production and Production Management o Production: the creation of goods using land, labor,  capital, entrepreneurship and knowledge (the factors of  production) o Production Management: All the activities managers do  to help firms create goods ∙ Operations Management o Operations Management: A specialized area in  management that converts or transforms resources into  goods and services o Operations management includes:  Inventory management   Quality control  Production scheduling  Follow-up services ∙ Operations Management in the Service Sector o All about creating a good experience for those who use the service o In hotels, like Ritz Carlton, operation management includes fine dining, fresh flowers, and training for every employee ∙ TEST PREP:o What have U.S. manufacturers done to regain a  competitive edge? o What must U.S. companies do to continue to  strengthen the country’s manufacturing base? o What led companies to focus on operations  management rather than production?  Manufacturers have regained a competitive  advantage by focusing on the following: The  needs of customers, maintaining a close  relationship with suppliers to make sure they  are meeting customer needs, practicing  continuous improvement, focusing on quality,  saving on costs through better site selection,  using new technologies, adopting new  production techniques.   To strengthen the nation’s manufacturing base will require an adjustment and recognition of  the new realities in manufacturing. This will  require focusing on new technologies, such as  the green ventures discussed in your textbook.  The nature of business has changed  dramatically in the past twenty years forcing  companies to focus on operations  management. One change is the shift from a  manufacturing economy to one dominated by  the service industry. Operations management  is a more specialized area of management that converts resources into useful outputs.  ∙ The production process ∙ Form Utilityo Form Utility: the value producers add to materials in the  creation of finished goods and services ∙ Groves basic production requirements o 1. To build and deliver products in response to the  demands of the customer at the scheduled delivery time o 2. To provide an acceptable quality level  o To provide everything at the lowest possible cost ∙ Process and Assembly in Production o Process Manufacturing- the part of production that  physically or chemically changes materials o Assembly process- the part of the production process  that puts together components ∙ Key production processes o Production processes are either continuous or intermittent o Continuous process- long production runs turn out  finished goods over time  o Intermittent process- production runs are short and the  producer adjusts machines frequently to make different  products ∙ Developments Making US Companies More Competitive: o 1. Computer-aided design and manufacturing  o 2. Flexible manufacturing o 3. Lean Manufacturing o 4. Mass customization ∙ Computer-Aided Design and Manufacturing o Computer-Aided Design (CAD): The use of computers in the design of products o Computer-Aided Manufacturing (CAM): The use of  computers in the manufacturing of products ∙ Computer Integrated Manufacturing o Computer Integrated Manufacturing (CIM): The  uniting of computer-aided design with computer aided  manufacturing   Expensive but cuts as much as 80% of the time  needed to program machines to make parts ∙ Flexible Manufacturing  o Flexible Manufacturing: Designing machines to do  multiple tasks so they can produce a variety of products  Allen Bradley: uses flexible manufacturing to build  motor starters  26 machines and robots build, test and package  parts ∙ Lean Manufacturing o Lean Manufacturing: using less of everything than in  mass production o Compared to other companies, Lean companies:  Take half the human effort  Have half the defects in finished products  Require one third the engineering effort  Use half the floor space  Carry 90% less inventory  ∙ Mass Customization o Mass Customization: Tailoring products to meet the  needs of a large number of individual customers  More manufacturers are learning to customize  Mass customization exists in the service sector too ∙ Robotics and Sensing o The use of robotics allows manufacturing to continue 24  hours a day  o Sensors can detect problems immediately and changes can be made quickly o Nanomanufacturing can manipulate on material on the  molecular level  ∙ TEST PREP o What is form utility? o Define and differentiate the following: process  manufacturing, assembly process, continuous  process and intermittent process. o What do you call the integration of CAD and CAM? o What is mass customization?  Form utility is the value producers add to  materials in the creation of finished goods and  services. For example, when a company  transforms raw steel into the body of an  automobile they are creating form utility.  Process manufacturing physically or chemically changes materials, such as turning sand into  glass or computer chips. The assembly  process puts together components to create a  product. For example, cars are made through  an assembly process that puts together the  frame, engine and other parts. Continuous  process involves long production runs turning  out finished goods over time. For example, a  plant that makes plastic cups is run on a  continuous process. Rather than using long  runs, an intermittent process involves short  runs that respond directly to specific customer  orders. An example of this process would include manufacturers of men’s custom  business suits.  The integration of CAD and CAM is referred to  as computer-integrated manufacturing or CIM.   Mass customization is the process of tailoring  products to meet the demands of a large  number of individual customers. One example  of this process is NIKEiD which allows  customers to design athletic shoes by choosing from a variety of colors and designs. For more  information on this process go to  www.nikeid.nike.com.  ∙ Operations Management o Operations management planning helps solve problems  like:  Facility location   Facility layout  Materials requirement planning  Purchasing  Inventory control  quality control  ∙ Facility Location o Facility Location: the process of selecting a geographic  location fo a company’s operations o Rising numbers of internet businesses means brick-and mortar retailers must find great locations ∙ Do we stay or do we go? o Potential of low-cost labor is very attractive to companies  hoping to remain competitive o However, shuttering operations and moving can often  cause severe economic problems in dependent areas ∙ Operations Management on the Internet o Sometimes businesses outsource engineering, design and  manufacturing to other companies o Often these relationships are managed through the  internet o Many companies are developing Internet- focused  strategies ∙ Future Facility Location  o Information technology gives firms increased flexibility in  terms of location  o Telecommuting: working from home via the computer ∙ Setting up the Facilityo Facility Layout: the physical arrangement of resources,  including people, to most efficiently produce goods and  services o Facility layout depends on the process performed:  Service: help customers find products  Manufacturing: Improve efficiency  ∙ Facility Layout Options o 1. Assembly Line Layout: workers do only a few tasks at  a time.  o 2. Modular layout: teams of workers produce more  complex units of a final product o 3. Fixed position layout: allows workers to congregate  around the product o 4. Process layout: similar equipment and functions are  grouped together ∙ MRP and ERP  o Materials Requirement Planning (MRP): A computer based operations management system that uses sales forecasts to make  sure parts and materials are available when needed  o Enterprise Resource Planning (ERP): A newer version  of MRP, combines computerized functions into a single  integrated software program using a single database∙ Purchasing o Purchasing: the function that searches for high –quality  material resources, finds the best suppliers and negotiates  the best price for goods and services o The internet has transformed purchasing ∙ Inventory Control  o Just-in-Time (JIT) Inventory Control: the production  process in which a minimum of inventory is kept and parts, supplies and other needs are delivered just in time to go on the assembly line o To work effectively, the process requires excellent  coordination with suppliers ∙ Quality control  o Quality: consistently producing what the customer wants  while reducing errors before and after delivery  o Six-Sigma quality: a quality measure that allows only  3.4 defects per million opportunities ∙ The Six-sigma process ∙ Statistical  Quality Control:  a process used to  continually monitor all phases of the production process ∙ Statistical process control: a process of testing statistical  samples of product components at each stage of production ∙ Measuring quality along the production process reduces the need for quality control at the end  ∙ The Baldrige awards:  o Companies can apply for awards in these areas:  Manufacturing  Services  Small businesses  Non-profit/government   Eduacation   Healthcare ∙ What is ISO? o The international Organization for Standardization  (ISO): a worldwide federation of national standard bodies o ISO9000: the common name given to quality  management and assurance standards o ISO 14000: A collection of the best practices for managing an organization’s impact on the environment  ∙ TEST PREP o What are the major criteria for facility location? o What’s the difference between MRP and ERP? o What’s just-in-time inventory control? o What are Six Sigma quality, the Baldrige Award, ISO  9000 and ISO 14000?  Managers must always consider the customer  and the impact on customers’ ability to use the company’s services and to communicate about  their needs. Other criteria that need to be  considered include: labor costs, availability of  resources, access to transportation, proximity  to customers, suppliers, crime rates, quality of  life for employees and the cost of living, to  mention but a few.   Materials requirement planning or (MRP) is a  computer-based operations management  system that uses sales forecasts to make sure  needed parts and materials are available at the right time and place. Enterprise resource  planning (ERP), a newer version of MRP,  combines the computerized functions of all the divisions and subsidiaries of the firm into a  single integrated software program that uses a single database.   One major expense in the production process is the holding of parts. The goal of just-in-time  inventory is to eliminate or reduce that cost. Just-in-time inventory systems keep a minimum of inventory on the premises and only deliver  parts just as they are needed on the factory  floor.   Six Sigma is a quality-control standard which  sets a benchmark of no more than 3.4 defects  per million opportunities. The Baldrige Award  was created in 1987 to promote a standard for  overall quality in the following areas:  manufacturing, services, small business,  education, and health care. The award was  named after Malcolm Baldrige, the late U.S.  secretary of commerce. The International  Organization for Standardization or ISO is a  worldwide federation of national standards  bodies from more than 140 countries. This  nongovernmental organization establishes  global measures for the quality of individual  products. ISO 9000 is the common name given to quality management and assurance  standards, while ISO 14000 is a collection of  the best practices for managing an  organization’s environmental impact.  ∙ (PERT) Program Evaluation and Review Technique: A  method for analyzing the tasks involved in completing a given  project and estimating the time needed ∙ Steps involved in PERT o 1. Analyzing and sequencing tasks o 2. Estimating the time needed to complete each task  o 3. Drawing a PERT network illustrating  Critical Path: The sequence of tasks that takes the  longest to complete ∙ PERT Chart for a Music Video∙ Gantt chart: a bar graph that shows what projects are being  worked on and how much has been completed o GET PIC  ∙ TEST PREP o Draw a PERT chart for making breakfast of three minute eggs, buttered toast and coffee. Define the  critical path. o How could you use a Gantt chart to keep track of  production?  To answer this question please refer to figure  9.3 in the textbook.   A Gantt chart is a scheduling mechanism used  by manufacturers for measuring production  progress. This chart will give management a  clear idea as to the status of the project and  how much has been completed at any given  time. Chapter 19 Lecture Notes: Using Securities Markets for Financing and Investing Opportunities ∙ Learning Objectives: o Describe the role of securities markets and of investment  bankers o Identify the stock exchanges where securities are traded o Compare the advantages and disadvantages of equity  financing by issuing stock, and detail the differences  between common and preferred stock  o Compare the disadvantages and advantages of obtaining  debt financing by issuing bond, and identify the classes  and features of the bonds o Explain how to invest in securities markets and set  objectives such as long-term growth, income, cash and  protection from inflation o Analyze the opportunities stocks offer as investments o Analyze the opportunities bonds offer as investments o Explain the investment opportunities in mutual funds and  exchange-traded funds (ETFs) o Describe how indicators like the Dow Jones Industrial  Average affect the market ∙ Melody Hobson: Ariel Investments o Hobson started as an intern at Ariel Investments after  graduating from Princeton in 1991 o Now, as president of the company, she oversees more than $9 billion in assets o Preaches patience in investing  o Ariel Investments focuses on Stocks and equity funds that  should perform in the long term ∙ Name that Company  o If someone had bought 100 shares in this company when it was first available to the public in 1965, it would have cost  $2,250. If they held onto the stock, the number of shares  they’d have today would be 74,360 (after 12 stock splits)  with a value of approx.. 7.4 million :McDonalds ∙ The Basics of Secruties Markets o Securities markets are financial marketplaces for stocks  and bonds and serve two primary functions  1. Assist businesses in finding long-term funding to  finance capital needs.  2.Provide private investors a place to buy and sell  securities such as stocks and bonds. ∙ Types of Securities Marketso Securities markets are divided into primary and secondary  markets  Primary markets handle the sale of new securities  Secondary markets handle the trading of securities  between investors with the proceeds of the sale  going to the seller o Initial Public Offering (IPO): The first offering of a  corporation’s stock ∙ Investment Bankers and Institutional Investors o Investment Bankers: Specialists who assist in the issue  and sale of new securities o Institutional Investors  Large organizations such as pension funds or mutual  funds tht invest in their own funds or the funds of  others ∙ Stock Exchanges: o Stock exchange : an organization whose members can  buy and sell (exchange) securities on behalf of the  companies and individual investors o Over-the-counter (OTC) Market: provides companies  and investors with a means to trade stocks not listen on  the national securities exchanges o NASDAQ: A telecommunications network that links  dealers across the nation so they can exchange securities  electronically ∙ Top Stock Echanges: o NYSE Euronext o NASDAQ o London Stock Exchange o Tokyo Stock Exchange o Deutsche Borse ∙ Giving Small Business a Jump on Funding o The goal of the JOBS Act is to ease small business financing problems  o The SEC adopted new rules, including  Raised from 500 to 2,000 the number of share  holders a company could have before it must register its stock with the SEC  Allows equity crowdfunding through brokers or  protals   Expanded the abilities of private companies to raise  capital   through limited stock offerings ∙ The Securities and Exchange Commissiono Securities and Exchange Commission (SEC): The  federal agency responsible for regulating the various stock  exchanges; created in 1934 through the Securities and  Exchange Act. o Prospectus: A condensed version of economic and  financial information that a company must file with the SEC before issuing stock; the prospectus must be sent to  prospective investors. ∙ TEST PREP o What is the primary purpose of a securities  exchange? o What does NASDAQ stand for? How does this  exchange work?  The primary purpose of a securities exchange  is to allow members of the exchange to buy or  sell securities on behalf of investors.  NASDAQ stands for National Association  Securities Dealers Automated Quotations. This exchange is completely electronic allowing for  orders to be quickly matched up via computers. ∙ Learning the Language of Stocks o Stocks: Shares of ownership in a company  o Stock Certificate: evidence of stock ownership o Dividends: Part of a firm’s profits that the firm may  distribute to stockholders as either cash or additional  shares ∙ Advantages of Issuing Stokc  o Stockholders are owners of a firm and never have to be  repaid their investment  o There is no legal obligation to pay dividends o Issuing stock can improve a firms’ balance sheet since  stock creates no debt  ∙ Disadvantages of Issuing Stock  o Stockholders have the right to vote for a company’s board  of directors o Issuing new shares of stock can alter the control of a firm  o Dividends are paid from after-tax profits and are not tax  deductible  o The need to keep stockholders happy can affect  management’s decisions ∙ Two Classes of Stock  o Common Stock: The most basic form; holders have the  right to vote for the board of directors and share in the  profits if dividends are approvedo Preferred Stock: Owners are given preference in the  payment of company dividends before common stock  dividends are distributed. Preferred stock can also be   Callable   Convertible  Cumulative ∙ In the event of bankruptcy, the rights of  common stock holders are subordinated to  preferred stock holders.  ∙ TEST PREP o Name at least two advantages and disadvantages of a company’s issuing stock as a form of equity  financing  o What are the major differences between common  stock and preferred stock?  Advantages of issuing stock: equity never has  to be repaid, the company is under no legal  obligation to pay dividends, and selling stock  can improve a company’s balance sheets since  it doesn’t create debt. Disadvantages: equity  holders have the right to vote, dividends are  not tax deductible, and the need to keep  shareholders happy can affect managers  decisions.  Common stock holders have the right to vote,  while preferred stock holders do not.  Preferred stock holders have rights if the  company enters bankruptcy. Preferred stock  holders receive a fixed dividend, while common holders are not guaranteed to be paid a  dividend.  ∙ Learning the Language of Bonds o Bond: A corporate certificate indicating that an investor  has lent money to a firm (or a government) o The principal is the face value of the bond  o Interest: The payment the bond issuer makes to the  bondholders to compensate them for the use of their  money  ∙ Types of Bonds∙ Advantages of Issuing Bondso Bondholders are creditors, not owners of the firm and  cannot vote on corporate matters o Bond interest is tax deductible e o Bonds are a temporary source of funding and are  eventually repaid o Bonds can be repaid before the maturity date if they are  callable ∙ Disadvantages of Issuing Bonds o Bonds increase debt and can affect the market’s  perception of the firm  o Paying interest on bonds is a legal obligation o If the interest is not paid, bondholders can take legal action o The face value of the bond must be repaid on the maturity  date ∙ Bond Ratings ∙ Different Classes of Corporate Bonds o Corporations can issue two classes of bonds  Unsecured bonds (debenture bonds): not backed by  specific collateral  Secured bonds: backed by collateral (land or  equipment) ∙ Special Features in Bond Issueso Sinking Fund: Reserve account set up to ensure that  enough money will be available to repay bondholders on  the maturity date o Callable bonds permit bon issuers to pay off the principal  before the maturity date o Convertible bonds allow bondholders to convert their  bonds into shares of common stock  ∙ TEST PREP o Why are bonds considered a form of debt financing? o What does it mean if a firm issues a 9% debenture  bond due in 2025? o Explain the difference between an unsecured and  secured bond. o Why are convertible bonds attractive to investors?  Bonds are considered debt financing, since  they must be paid back when the bond  matures.   A 9% debenture bond due in 2025 has a  coupon rate or interest rate of 9 percent and  matures in 2025.  A secured bond is backed by some form of  collateral. While an unsecured bond or  debenture is not backed or secured by any  collateral.  Convertible bonds are attractive, because they  give bondholders the option to convert their  bonds into stock. This is attractive since  stocks tend to appreciate faster than bonds do. ∙ Buying Securities o Stockbroker- A registered representative who works as a  market intermediary to buy and sell security for clients o Online trading services, such as TD Ameritrade, E*trade  and Scottrade, offer securities trading services online to  buy and sell stocks and bonds ∙ Money Going Up in Smoke o You recently received news that your Uncle Alex passed  away after a long battle with lung cancer caused by  smoking. He left you $25,000 in his will, saying you were  his favorite nephew.  o Your friend Jack recommends that you buy stock in a well known multinational firm that is primary product is  tobacco. o Will you invest your inheritance in a company that markets  tobacco? ∙ Five Investment Criteriao 1. Investment Risk o 2. Yield o 3. Duration o Liquidity  o Tax consequences ∙ Investing 101: Things to Do before Making Your First  Investment  o Take an investing class o Attend a conference o Head to the library and pickup investing books  Some people want to jump right into an investment.  This slide shows three ways to learn about  investment strategies.  Ask students: Would you take an investing class or  jump straight into the market? Would you know how  to do the needed research? ∙ Average Annual Return of Asset Classes (Since 1962) o GET PIC ∙ Diversification o Buying several different types of investments to spread the risk of investing  If diversifying, an investor may put ∙ 25% of his/her money into US growth stocks ∙ 25% in government bonds ∙ 25% in dividend-paying stocks ∙ 10% in an international mutual fund ∙ The rest in a savings account  Diversification helps spread risk by buying different  types of investments. ∙ Global Stocks: Love them or Leave Them  o Suggestions for building your financial future  Invest in familiar global companies with a solid  reputation and performance records  Invest only in global stocks listed on US exchanges  Invest in global mutual funds that focus on specific  countries or regions  Use extreme caution if investing in unstable  countreis ∙ Primary Investment Services Consumers Need o Savings and investing Advice o Help with 401K plans o Retirement planning o Tax planningo Estate planning o Education expense planning ∙ TEST PREP o What is the key advantage of investing through  online brokers? What is the key disadvantage? o What is the primary purpose of diversifying  investments?  The main advantage of investing through  online brokers is that the fees charged tend to  be lower than traditional brokers. The key  disadvantage is that investors must generally  do their own research and make their own  investment decisions without direct assistance  from their broker.   The goal of diversification is to reduce the  overall risk an investor assumes.  ∙ Perceptions of the Market o Bulls: investors who believe stock prices are going to rise o Bear: Investors who expect stock prices to decline  ∙ Bear Market Declines in the S&P 500 o This slide profiles the bear market declines over the past  forty years o The past decade has been abysmal with two significant  bear markets ∙ Selecting Stocks o Capital Gains: The positive difference between the price  at which you bought a stock and what you sell it or o Investors can also choose stocks according to their  strategy   Blue-chip stocks  Growth stocks  Income stocks  Penny Stocks ∙ Stock Splits o An action by a company that gives stockholders two or  more shares fo additional stock for every share that they  own  o Spits cause no change in the firm’s ownership structure  and no change in the investment’s value  o Firms can never be forced to split their stocks  An important point to note is investment value does  not change immediately after the stock split. The  investor has the same original dollar value as before  the split. The hope for the investor is that the lower  price will cause the demand for the stock to increase,raising the stock price (which will increase their total  investment value since they have more shares due to the stock split).   Dividend rates are also divided according to the  degree of split.   Most stock splits are two-for-one splits.   Since 1975, Wal-Mart has split their shares on eight  different occasions. If an individual investor  purchased 100 shares in 1980 they would own  25,600 shares after adjusting for splits! ∙ Buying Stock on Margin  o Borrowing some of the stock’s purchase cost from the  brokerage firm o Margin is the portion of the stock’s purchase price that the  investor must pay with their own money  o If a broker issues a margin call, the investor has to come  up with money to cover losses  Investors purchasing on margin are increasing their  purchasing power, so they can own more stock  without fully paying for it.   Students should know the risk associated with buying stocks on margin. Margin exposes investors to the  following risks:  You can lose more money than you invested.  You may have to deposit additional cash or securities in your account on short notice to cover market  losses.  You may be forced to sell some or all of your  securities when falling stock prices reduce the value  of your securities.  Your brokerage firm may sell some or all of your  securities without consulting you to pay off the loan  it made to you.  Know that your firm charges you interest for  borrowing money which will affect the total return on  your investments. ∙ Understanding Stock Quotations∙ Top Financial News and Research Sites o Yahoo Finance  o Daily Finance o MSN Money  o Forbes o Dow Jones and Co.  Financial information is now readily available online.  This slide lists some of the sites where information  can be easily gathered.   If time allows, encourage students to visit these  web sites and evaluate their usefulness.  Ask students: Which of these web sites was the  best? Why would it be a good idea to consult more  than one of these web sites before deciding to  invest? ∙ Important Bond Questions o First time bond investors generally ask two questions  Do you have to hold a bond until the maturity date?  How can I assess the investment risk of a particular  bond issue? o Junk Bonds: bonds that are high risk and have high  default rates ∙ Understanding Bond Quotations ∙ I n vesting in Mutual Funds and Exchange-Traded Funds o Mutual Funds: An organization that buys stocks and  bonds and then sells shares in those securities to the  public. The fund pools investors’ money and buys stock  according to the fund’s purpose o Exchange- Traded Fund (ETF): Collections of stocks and  bonds that are traded on securities exchanges, but are  traded more like individual stocks than mutual funds ∙ What Mutual Funds Can Learn From KaChing o 1. Reform the ratings system o 2. Give information for free o 3. Cut out useless fees o 4. Be transparent o 5. Share insights ∙ Percentage of Households Owning Mutual Funds o GET PIC∙ Varieties of ETFS ∙ Understanding Mutual Fund Quotations o GET PIC∙ Comparing Investments ∙ TEST PREP o What is a stock split? Why do companies sometimes  split their stock? o What does buying stock on margin mean? o What are mutual funds and ETFs? o What is the key benefit to investors in investing in a  mutual fund or ETF?  When a company splits its stock 2 for 1 the  shareholders receive two shares of stock for  each share they own. The current share price  is cut in half, so the number of shares  increases, the total value of the investment  remains the same. The board may decide to  split a company’s stock 2 for 1, 3 for 2 or any  other ratio they determine is appropriate. The  reason that a company splits its stock is to  reduce the price of the stock which will  hopefully increase the demand for the stock.   When an investor buys on margin, they use  money borrowed from their broker to purchase stock.  A mutual fund is an investment fund that buys  stocks and bonds then sells shares in those  securities to the public. The pooling of funds  allows small investors to invest in a broader  selection of stocks and bonds. Most mutual funds are professionally managed. ETFs are  similar to mutual funds, but are traded on  exchanges like individual stocks and are  passively managed.   The key benefit to investing in a mutual fund  or ETF is that the investor gets instant  diversification.  ∙ The DOW o GET PIC ∙ Key Stock Market Indicators o Dow Jones Industrial Average: The average cost of 30  selected industrial stocks o Critics say the 30-company Dow is too small a sample and  suggest following the S&P 500. o S&P 500 tracks the performance of 400 industrial, 40  financial, 40 public utility, and 20 transportation stocks ∙ Market Turmoil o The stock market has its shares of ups and downs  October 29,1929: Black Tuesday; the market lost  13% of its value  October 19,1987: The market suffered its worst  one-day drop  October 27, 1997: Fears of an economic crisis in  Asia cause widespread panic and losses ∙ Turmoil in the 2000s o The market collapsed into a deep decline in 2000-2002  when the dot com bubble burst  Investors lost $7 trillion in market value  o Starting in 2008, the collapse of the real estate market  sent financial markets into panic  The U.S. government made significant investments in private banks and offered a large stimulus package  to reenergize the economy.  ∙ The Wall Street of NOW o GET PIC ∙ The UPS and DOWNS of the MARKET o Program Trading: giving instructions to computers to  automatically sell if the price of a stock dips to a certain  point to avoid potential losses o Analysts believe the program trading caused the turmoil in  1987 o The exchanges created mechanisms to restrict program  trading   The downturn of 1987 prompted the U.S.  exchanges to create mechanisms called curbs and circuit breakers to restrict program trading whenever the market moves up or down by a  large number of points in a trading day. A key  computer is turned off and program trading is  halted.  If you watch programming on CNBC or MSNBC,  you’ll see the phrase “curbs in” appear on the  screen. ∙ WHO’S at FAULT for the ECONOMIC CRISIS? o Wall Street: - Issued exotic securities; paid excessive  compensation based on bonuses; and investment banks  got the SEC to relax capital requirements. o Main Street: Americans lived beyond their means;  lenders gave favorable loans to homebuilders; greedy  homeowners took out equity loans; and teaser mortgage  rates let people live large o Washington: Gramm-Leach-Billey Act allowed commercial and investment banks to partner; housing interest rates  were kept low; and Community Reinvestment Act forced  lending to people with bad credit. o ∙ Cleaning UP the STREET:  Dodd-Frank represents the most sweeping  change in financial regulation since the Great  Depression.   Although it’s not perfect, the Dodd-Frank Act  at least resolves some of the most pressing  issues facing our economy today, while setting  the stage for a stronger financial future. ∙ TEST PREP: o What does the Dow Jones Industrial Average  measure? Why is it important? o Why do the 30 companies comprising the Dow  change periodically? o Explain program trading and the problems it can  create.  The Dow Jones Industrial Average is the  average price of 30 specific industrial stocks. It is important because it allows followers of the  market to track the general direction of the  stock market.   The Dow will delete and add new companies to  the Dow Jones Industrial Average to reflect  increased economic importance of a particular  company or industry. Recently, Cisco and  Travelers replaced Citi and GM.   Program trading occurs when investors give  instructions to their computers to execute a  sell order if the stock price dips to a certain  point. Many attribute the stock market crash  of 1987 to program trading as computer sell  orders caused many stocks to fall to incredible  levels. Chapter 20: Money, Financial Institutions, and the Federal Reserve ∙ Learning Objectives o Explain what money is and what makes money useful. o Describe how the Federal Reserve controls the money supply. o Trace the history of banking and the Federal Reserve System. o Classify the various institutions in the U.S. banking system.  o Briefly trace the causes of the banking crisis, and explain how the  government protects your funds during such crises. o Describe how technology helps make banking more efficient. o Evaluate the role and importance of international banking, the World  Bank, and the International Monetary Fund. ∙ Janet Yellen: Federal Reserve o The first female chair of the Federal Reserve. o Earned her doctorate in economics from Yale and was appointed to the  Federal Reserve Board of Governors by President Clinton. o Almost every factor related to the economy is influenced by the  decisions she makes. ∙ What’s Money? o Money: Anything people generally accept as payment for goods and  services o Barter: The direct trading of goods or services for other goods or  services ∙ Standards for a Useful Form of Money o Portability o Divisibility  o Durability  o Stability  o Uniqueness ∙ The Bitcoin is in the Mail o Bitcoin is a digital currency created in 2008. o It is attractive to many users because there is no central regulating  authority.  o Transactions are between only two people without middlemen. o This, however, makes valuing Bitcoin difficult ∙ The Money Supply o Money Supply: The amount of money the Federal Reserve makes  available for people. The Money supply is referred to as:  M1: Money that can be accessed quickly (coins, paper money,  travelers’ checks, etc.)  M2: M1+money that may take a little time to obtain (savings  accounts, mutual funds, etc.)  M3: M2+ big deposits like institutional money market funds∙ How Long does Paper Money Last BILL HOW LONG $1 21 Months $5 16 Months $10 18 Months $20 24 Months $50 55 Months $100 89 Months


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Plan: What should your mailing accomplish?



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∙ Money Milestones Year Milestone 1956 Congress set the minimum wage at $1 an hour 1960 $10 million presidential campaign by Richard Nixon 1985 $100,000 bottle of wine sold at auction at Christie’s 1995 $1 Million cost for a 30-second commercial during Superbowl XXIX 2001 $10 movie ticket in NY 2004 $100 million Picasso Painting Sold at Sotheby’s 2007 $1billion stadium built in London (Wembley)

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We also discuss several other topics like What is responsible for the rising phase (2 points)?
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∙ ]Money Facts: What you might not know about what’s in your wallet? o In 2009, the U.S. printed 26,000,000 bills a day! o Each penny costs 1.6¢ and each nickel costs 6¢ to make. o The most-tracked bill on WheresGeorge.com has travelled over 4,100  miles in 3 years! o 2/3 of all U.S. $100 bills are outside the U.S. o 90% of paper money has traces of cocaine! ∙ Exchanging Money Globally o Falling dollar value: The amount of gods and services you can buy  with a dollar decreases o Rising dollar value: The amount of goods and services you can buy  with a dollar increases o What makes the dollar fall or rise is the position of the US economy  relative to other global economies ∙ The Impact of a Falling Dollar o Overseas demand for U.S. products rise. o A favorable exchange rate for U.S. companies increases profits in  foreign markets. o U.S. tourism increases which is good for hotels, resorts, theme parks,  and retailers that serve international travelers.∙ Five Major Parts of the Federal Reserve System  o 1. The Board of Governors o 2. The Federal Open Market Committee o 3. 12 Federal Reserve Banks o 4. 3 Advisory Councils o 5. The member banks of the system ∙ Largest Bank Failures o GET PIC ∙ The US Banking system  o Commercial banks o Savings and loan associations o Credit Unions o Nonbanks ∙ Commercial Banks o Commercial Bank: A profit seeking organization that receives  deposits from individuals and corporations in the form of checking and  savings accounts and uses those funds to make loans  o A commercial bank has two types of customers:  Depositors  Borrowers ∙ Commercial Banks’ Services o Demand Deposit: The technical name for a checking account; money is available on demand from the depositor o Time Deposit: A savings account; a bank can require a prior notice  before you make a withdrawal  o Certificate of Deposit: A savings account that earns interest, to be  delivered on the certificate’s maturity rate ∙ Would You Tell the Teller? o The bank teller mistakenly gives you $320 instead of the $300 you  asked for.  o You bring the error to her attention, but she disagrees she miscounted  the money. o You wonder whether to just keep the extra $20 even though you know  her accounts will not balance at the end of the day. o What are your alternatives? What do you do? ∙ Savings and Loan Associations o Savings and Loan Associations (S&Ls)—A financial institution that  accepts both savings and checking deposits and provides home  mortgage loans  o Often knonw as thrift institutions because their original purpose was to  promote customer thrift and home ownership ∙ Credit Unions o Credit Unions -- Nonprofit, member-owned financial cooperatives that offer the full variety of banking services to their members. o As nonprofits, credit unions enjoy an exemption from federal income  taxes. ∙ Nonbankso Nonbanks: Financial institutions that accept no deposits, but offer  many of the services provided by regular banks. Nonbanks include:  Life insurance companies  Pension funds  Brokerage firms  Commercial finance companies  Corporate financial services ∙ Taking a Bite out of the Sharks o Dealstruck is a new type of alternative, nonbank lender. o It uses a peer-to-peer model where wealthy investors provide capital  for the loans. o Interest rates range from 8 to 24% for loans up to $250,000 and can  stretch for a period of three years.  ∙ What Attracts customers to online banking o Free identity theft protection o Free credit score monitoring o Personal financial management o Instant messaging service o Bank’s blog ∙ TEST PREP o Why did the U.S. need a Federal Reserve Bank? o What is the difference between a bank, a savings and loan  association, and a credit union? o What is a consumer finance company?  The Federal Reserve emerged after the banking crisis of  1907 and was organized originally to be a lender of last  resort.   After bank deregulation, the services offered by banks  and S&Ls are now similar. They both offer many of the  same services. Credit Unions are tax-exempt member owned cooperatives that operate like banks.   Consumer finance companies offer short-term loans to  those who cannot meet the credit requirements of  regular banks.  ∙ The Banking Crisis o Almost 5 million households suffered through housing foreclosures  since 2007. o Since the banks owned the mortgages, their profits declined.  o This led to a banking crisis and the government had to help the banks  out. o Assigning blame to only one agency is not possible, but it had to be  fixed. ∙ Protecting Depositors’ Money o The Federal Deposit Insurance Corporation (FDIC) -- An  independent agency of the U.S. government that insures bank deposits up to $250,000. o The Savings Association Insurance Fund (SAIF) -- Insures holders  of accounts in savings and loan associations.o The National Credit Union Administration (NCUA) -- Provides up  to $250,000 coverage per individual depositor per institution. ∙ Technological Advancement in Banking o Electronic Funds Transfer System :Messages about a transaction  are sent from one computer to another so funds can be transferred  quickly and more economically o Debit Card: Serves the same function as a check; it withdraws funds  from a checking account  ∙ Smart Cards o Smart Card: a combination of a creditcard, debit card, phone card,  driver’s license and more  ∙ Making Transactions in Other Countries o Letter of Credit: A promise by the bank to pay the seller a given  amount if certain conditions are met o Banker’s Acceptance: A promise the bank will pay some specified  amount at a particular time  o Money exchange allows companies to go to a bank and exchange  currencies to use in a particular country (I.e. dollars for euros) ∙ Leading Institutions in International Banking o World Bank: Lends most of its money to less-developed nations to  improve their productivity and help raise standards of living and quality of life. o International Monetary Fund (IMF): Fosters cooperative monetary  policies that stabilize the change pf one national currency for another.  About 188 counties are a part of the IMF ∙ New Day, New Issues Across the Globe o The IMF and the World Bank are both trying to come up with answers  to the global issues that have become very serious.  o Christine Lagarde, managing director of the IMF, fears the financial  crisis did lasting harm to the potential pace of growth in many global  economies. o The IMF and World Bank are both trying to solve key global issues  before there is another serious crisis ∙ TEST PREP o What are some of the causes for the banking crisis? o What is the role of the FDIC? o How does a debit card differ from a credit card? o What is the World Bank and what does it do? o What is the IMF and what does it do?   After the internet bubble of the late 1990s, the Federal  Reserve lowered interest rates creating a situation in  which mortgage rates were low thus fueling a housing  boom. Banks relaxed their underwriting standards and  created mortgage-backed securities and sold them to  organizations throughout the world. The government did  not regulate these transactions well and banks collapsed  as housing values fell and individuals defaulted on their  loans.  The role of the FDIC is to insure bank deposits if a bank  were to fail. Bank deposits are currently insured up to  $250,000.  Unlike a credit card a debit card functions as a check,  withdrawing funds directly from a checking account. The debit card only allows you to spend money that is in your account; once the balance is zero the card cannot be  used. If the card is used with a zero balance, it will result in overdrafts.  The World Bank, also called the International Bank for  Reconstruction and Development, is responsible for  financing economic development.   The IMF was established to assist the smooth flow of  money among nations. Nations must join the IMF and  allow for flexible exchange rates, inform the IMF of  changes in a country's monetary policy, and to modify  policies on the advice of the IMF.  
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