BA 1101 CH. 9, 16 & 8

Finance (9)

Finance is the functional area of business that is responsible for finding, among all these alternatives, the best sources of funds and the best ways to use them.

FASB (8)

Financial Accounting Standards Board (FASB). This board consists of seven members appointed by the Financial Accounting Foundation. Each member serves a five-year term and can be reappointed to serve one additional term. Relevant Reliable Consistent Comparable

Financial accounting (8)

Financial accounting is the branch of accounting that addresses the needs of external stakeholders, including stockholders, creditors, and government regulators.

Financial Budgets (8)

Financial budgets focus on the firm's financial goals and identify the resources needed to achieve these goals. The two main financial budget documents are the cash budget and the capital expenditure budget. The cash budget identifies short-term fluctuations in cash flows, helping managers identify times when the firm might face cash flow problems—or when it might have a temporary surplus of cash that it could invest. The capital expenditure budget identifies the firm's planned investments in major fixed assets and long-term projects.

Financial Capital (9)

Financial capital refers to the funds a firm uses to acquire its assets and finance its operations. Firms use some of their capital to meet short-term obligations, such as paying bills from suppliers, meeting payroll, repaying loans from banks, and paying taxes owed to the government.

Financial Leverage (9)

Financial leverage is the use of debt to meet a firm's financing needs; a highly leveraged firm is one that relies heavily on debt. While the use of leverage can benefit a firm when times are good, a high degree of leverage is very risky.

Firewall (16)

Firewalls are another important tool to guard against hackers and other security threats. A firewall uses hardware or software (or sometimes both) to create a barrier that prevents unwanted messages or instructions from entering a computer system.

Profitability Ratios (9)

Firms are in business to earn a profit, and profitability ratios provide measures of how successful they are at achieving this goal.

Extranet (16)

Firms sometimes also create extranets by giving key stakeholders, such as suppliers or customers, limited access to certain areas of their intranet. Extranets enable firms to provide additional services and information to their external stakeholders.

Equity Financing (9)

For corporations, equity financing comes from two major sources: retained earnings and money directly invested by stockholders who purchase newly issued stock. Equity financing is more flexible and less risky than debt financing.

Hackers (16)

Hackers are skilled computer users who have the expertise to gain unauthorized access to other people's computers.

Hardware (16)

Hardware refers to the physical components used to collect, input, store, and process data, and to display and distribute information.

DSS (16)

In fact, many companies develop decision support systems (DSS) that give managers access to large amounts of data and the processing power to convert the data into high-quality information quickly and efficiently.

SEC (8)

In the United States, the Securities and Exchange Commission (SEC) has the ultimate legal authority to set and enforce accounting standards.

Intellectual property (16)

Intellectual property refers to products that result from creative and intellectual efforts.

Liabilities (8)

Liabilities indicate what the firm owes to non-owners—in other words, the claims non-owners have against the firm's assets. Balance sheets usually organize liabilities into two broad categories: current liabilities and long-term liabilities. Current liabilities, totaling $3.559 billion for McDonald's, are debts that come due within a year of the date on the balance sheet. McDonald's has, for example, $1.086 billion in accounts payable, that is, how much it owes suppliers on credit. Wages payable, $1.868 billion for McDonald's, what the firm owes to workers for work they have already performed, is another current liability, as are taxes, which amount to $604.7 million for McDonald's. Long-term liabilities are debts that don't come due until more than a year after the date on the balance sheet. McDonald's has $3.316 billion in long-term liabilities.

Management accountants (8)

Management accountants work within a company and provide analysis, prepare reports and financial statements, and assist managers in their own organization. Internal auditors also work within their organizations to detect internal problems such as waste, mismanagement, embezzlement, and employee theft.

Equity (8)

Owners' (or Stockholders') equity refers to the claims the owners have against their firm's assets. The specific accounts listed in the owners' equity section of a balance sheet depend on the form of business ownership. As Exhibit 8.1 shows, common stock is a key owners' equity account for corporations. For corporations like McDonald's, the owners' equity section is usually titled stockholders' equity. Also notice that retained earnings, which are the accumulated earnings reinvested in the company (rather than paid to owners), is another major component of the owners' equity section. McDonald's has $16.6 million in common stock and $15.6 billion in retained earnings, which it puts back into growing the company.

Phishing (16)

Phishing is another common use of spam. Phishers send email messages that appear to come from a legitimate business, such as a bank, credit card company, or retailer. Not content with phishing expeditions, some scam artists have now taken to pharming.

Public accountants (8)

Public accountants provide services such as tax preparation, external auditing (a process we'll describe later in this chapter), or management consulting to clients on a fee basis.

Line of Credit (9)

Rather than going through the hassle of negotiating a separate loan each time they need more funds, many firms work out arrangements with their bankers to obtain pre-approval so that they can draw on funds as needed. One way they do this is by establishing a line of credit.

Revenue (8)

Revenue represents the increase in the amount of cash and other assets (such as accounts receivable) the firm earns in a given time period as the result of its business activities. For example, Exhibit 8.2 shows that McDonald's has $28.1 billion in revenues, with $18.8 billion coming from company-owned restaurants and $9.2 billion coming from franchised restaurants. A firm normally earns revenue by selling goods or by charging fees for providing services (or both). Accountants use accrual-basis accounting when recognizing revenues. Under the accrual approach, revenues are recorded when they are earned, and payment is reasonably assured. It's important to realize that this is not always when the firm receives cash from its sales. For example, if a firm sells goods on credit, it reports revenue before it receives cash. (The revenue would show up initially as an increase in accounts receivable rather than as an increase in cash.)

Software (16)

Software refers to the programs that provide instructions to a computer so that it can perform a desired task. There are two broad categories of software: system software and application software.

Malware (16)

Software that is created and distributed with malicious intent is called malware (short for "malicious software"). Spyware, computer viruses, and worms are all examples of malware.

Audit (8)

The purpose of an audit is to verify that the company's financial statements were properly prepared in accordance with generally accepted accounting principles and fairly present the financial condition of the firm. So external auditors don't just check the figures, they also examine the accounting methods the company used to obtain those figures. The results of the audit are presented in an independent auditor's report, which is included in the annual report the firm sends to its stockholders. If the auditor doesn't find any problems with the way a firm's financial statements were prepared and presented, the report will offer an unqualified (or "clean") opinion—which is by far the most common outcome.

Retained Earnings (8)

The statement of retained earnings is a simple statement that shows how retained earnings have changed from one accounting period to the next. The change in retained earnings is found by subtracting dividends paid to shareholders from net income.

Business Intelligence Systems (16)

Called business intelligence systems, these systems help businesses discover subtle and complex relationships hidden in their data. Such systems can be a source of competitive advantage for the businesses that develop them.

Capital Budgeting (9)

Capital budgeting refers to the procedure a firm uses to plan for investments in assets or projects that it expects will yield benefits for more than a year.

Databases (16)

Typically, today's businesses store their data in databases, which are files of related data organized according to a logical system and stored on hard drives or some other computer-accessible storage media.

Cash Equivalents (9)

Cash equivalents are very safe and highly liquid assets that can be converted into cash quickly and easily. Commercial paper, U.S. Treasury Bills (T-bills), and money market mutual funds are among the most popular cash equivalents.

Cash Flows (8)

Cash flows from operating activities show the amount of cash that flowed into the company from the sale of goods or services, as well as cash from dividends and interest received from ownership of the financial securities of other firms. It also shows the amount of cash used to cover expenses resulting from operations and any cash payments to purchase securities held for short-term trading purposes. Remember that under the accrual method, not all revenues and expenses on the income statement represent cash flows, so operating cash flows may differ substantially from the revenues and expenses shown on the income statement. Cash flows from investing activities show the amount of cash received from the sale of fixed assets (such as land and buildings) and financial assets bought as long-term investments. Cash flows from financing activities show the cash the firm received from issuing additional shares of its own stock or from taking out long-term loans, the latter of which increased McDonald's cash by $1.5 billion. It also shows cash outflows from payment of dividends to shareholders, $3.1 billion for McDonald's, and to repay principal on loans.

Cloud Computing (16)

Cloud computing means using Internet-based storage capacity, applications, and processing power to supplement or replace internally owned computer resources.

Horizontal Analysis (8)

Using comparative statements to identify changes in key account values over time is called horizontal analysis.

Data (16)

Data are the facts and figures a firm collects. Data in their raw form have limited usefulness because they lack the context needed to give them meaning.

Information (16)

Data become information when they are processed, organized, and presented in a way that makes them useful to a decision maker.

Data mining (16)

Data mining uses powerful statistical and mathematical techniques to analyze vast amounts of data to identify useful information that had been hidden.

Debt Financing (9)

When a firm borrows funds, it enters into a contractual agreement with the lenders. This arrangement creates a legally binding requirement to repay the money borrowed (called the principal) plus interest. These payments take precedence over any payments to owners. Debt financing offers some advantages to firms. For instance, the interest payments a firm makes on debt are a tax-deductible expense.

E-commerce (16)

E-commerce refers to marketing, buying, selling, and servicing of products over a network (usually the Internet). You're probably most familiar with business-to-consumer (B2C) e-commerce. business-to-business (B2B) e-commerce, which consists of markets where businesses sell supplies, components, machinery, equipment, or services to other businesses, actually accounts for a much larger volume of e-commerce. e-marketplaces, which provide a platform for businesses in specific B2B markets to interact.

Cost (8)

Accountants define cost as the value of what is given up in exchange for something else. Out-of-pocket cost (also called explicit costs) are usually easy to measure because they involve actual expenditures of money or other resources. But accountants realize that not all costs involve a monetary payment; sometimes what is given up is the opportunity to use an asset in some alternative way. Such costs are often referred to as implicit cost. As the name implies, fixed costs don't change when the firm changes its level of production Variable costs are costs that rise (vary) when the firm produces more of its goods and services. As a company ramps up its production, it is likely to need more labor and materials and to use more electrical power. Direct cost are those that can be directly traced to the production of the product. On the other hand, the costs a firm incurs for plant maintenance, quality control, or depreciation on office equipment are usually classified as indirect costs since they tend to be the result of the firm's general operation rather than the production of any specific product.

Accounting (8)

Accounting is a system for recognizing, organizing, analyzing, and reporting information about the financial transactions that affect an organization. The goal of this system is to provide its users with relevant, timely information that helps them make better economic decisions. sometimes called language of business

Intranet (16)

An intranet is a private network that has the same look and feel as the Web and uses the same web browser software to display documents, but limits access to the employees of a single firm (or members of a single organization).

Applications Software (16)

Applications software is software that helps users perform a desired task. Horizontal applications software, such as word processing, spreadsheet, and personal information management software, is used by many different businesses and occupations. Vertical applications software is designed for a specific industry or profession.

Managerial Accounting (8)

As its name implies, this branch of accounting is designed to meet the needs of a company's managers, though in recent years many firms have empowered other employees and given them access to some of this information as well.

Asset Management Ratios (9)

Asset management ratios (also sometimes called activity ratios) measure how effectively an organization uses its assets to generate net income.

Assets (8)

Assets are things of value that the firm owns. Balance sheets usually classify assets into at least two major categories. The first category, called current assets, consists of cash, $2.798 billion, and other assets that the firm expects to use up or convert into cash within a year. For example, in McDonald's balance sheet, the value for accounts receivable, $1.319 billion, refers to money owed to McDonald's by franchise restaurants who bought its goods on credit. (These receivables are converted into cash when the franchise restaurants pay their bills.) Inventory, also a current asset, represents the $123.7 million of burgers, fries, and other foods and ingredients used in McDonald's restaurants. If this strikes you as not very much, you're right. It isn't, because McDonald's never has more than three to four days of inventory on hand in its restaurants. McDonald's has $807.9 million of prepaid expenses, such as insurance, or prepaid advertising, that have been paid before they are due.

Pro forma financial statements (9)

Budgeted Income Sheet Budgeted Balance Sheet

Budgeting (8)

Budgeting is a management tool that explicitly shows how a firm will acquire and allocate the resources it needs to achieve its goals over a specific time period. The budgetary process facilitates planning by requiring managers to translate goals into measurable quantities and identify the specific resources needed to achieve these goals. But budgeting offers other advantages as well. The firm's master budget organizes the operating and financial budgets into a unified whole, representing the firm's overall plan of action for a specified time period.

Expenses (8)

Expenses indicate the cash a firm spends, or other assets it uses up, to carry out the business activities necessary to generate its revenue. Under accrual-basis accounting, expenses aren't necessarily recorded when cash is paid. Instead, expenses are matched to the revenue they help generate. The specific titles given to the costs and expenses listed on an income statement vary among firms—as do the details provided. But the general approach remains the same: costs are deducted from revenue in several stages to show how net income is determined. The first step in this process is to deduct costs of goods sold, $15.5 billion for McDonald's, which are costs directly related to buying, manufacturing, or providing the goods and services the company sells. (Manufacturing companies often use the term cost of goods manufactured for these costs.) The difference between the firm's revenue and its cost of goods sold is its gross profit, which was $12.5 billion for McDonald's. The next step is to deduct operating expenses, totaling $3.7 billion for McDonald's, from gross profit. Operating expenses are costs the firm incurs in the regular operation of its business. Most income statements divide operating expenses into selling expenses (such as salaries and commissions to salespeople and advertising expenses) and general (or administrative) expenses (such as rent, insurance, utilities, and office supplies). McDonald's, however, typically owns the land and the building of franchised restaurants. So, it has another large, but specialized operating expense of $1.6 billion to pay for franchised restaurants' occupancy expenses. The difference between gross profit and operating expenses is net operating income, which is $8.7 billion for McDonald's. Finally, interest expenses and taxes are deducted from net operating income to determine the firm's net income. After paying $559.8 million in interest expenses and $2.6 billion in taxes, McDonald's net income is $5.58 billion

Broadband Internet Connection (16)

A broadband Internet connection has the capacity to transmit large amounts of data very quickly, allowing users to quickly download large files such as music, games, and movies

Covenant (9)

A covenant is a requirement a lender imposes on the borrower as a condition of the loan. One common covenant requires the borrower to carry a specified amount of liability insurance.

Data Warehouse (16)

A data warehouse is a very large, organization-wide database that provides a centralized location for storing data from both the organization's own databases and external sources.

Factor (9)

A factor buys the accounts receivables of other firms.

Revolving Credit Agreement (9)

A revolving credit agreement is similar to a line of credit, except that the bank makes a formal, legally binding commitment to provide the agreed-upon funds.

Expert System (16)

An expert system helps managers make better decisions by asking a series of questions until enough information is gathered to reach a decision.

Accounting Equation (8)

Assets= Liabilities+Equity

Commercial Paper (9)

For instance, many large corporations with strong credit ratings issue commercial paper, which consists of short-term promissory notes (IOUs). Commercial paper can be issued for up to 270 days, but most firms typically issue it for much shorter periods—typically 30 days, but sometimes for as little as two days. One key reason commercial paper is popular with companies is that it typically carries a lower interest rate than commercial banks charge on short-term loans.

Government accountants (8)

Government accountants perform a variety of accounting functions for local, state, or federal government agencies. Some ensure that the government's own tax revenues and expenditures are recorded and reported in accordance with regulations and requirements. Others work for the IRS to audit tax returns or for other government agencies, such as the SEC or FDIC, to help ensure that our nation's banks and other financial institutions comply with the rules and regulations governing their behavior

Leverage Ratio (9)

Leverage ratios measure the extent to which a firm uses financial leverage. One common measure of leverage is the debt-to-asset ratio (sometimes just called the debt ratio), which is computed by dividing a firm's total liabilities by its total assets.

Liquidity Ratio (9)

Liquidity ratios measure the ability of an organization to convert assets into the cash it needs to pay off liabilities that come due in the next year. ne of the simplest and most commonly used liquidity ratios is the current ratio, which is computed by dividing a firm's current assets by its current liabilities.

Accounting used by (8)

Managers, stockholders, creditors, employers, government agencies suppliers

Net Income (8)

Net income is the profit or loss the firm earns in the time period covered by the income statement. If net income is positive, the firm has earned a profit. If it's negative, the firm has suffered a loss. Net income is called the "bottom line" of the income statement because it is such an important measure of the firm's operating success.

Trade Credit (9)

One of the most important sources of short-term financing for many firms is trade credit, which arises when suppliers ship materials, parts, or goods to a firm without requiring payment at the time of delivery.

Operating Budgets (8)

Operating budgets are budgets that identify projected sales and production goals and the various costs the firm will incur to meet these goals. These budgets are developed in a specific order, with the information from earlier budgets used in the preparation of later budget

Spam (16)

Spam refers to unsolicited commercial emails, usually sent to huge numbers of people with little regard for whether they are interested in the product or not.

System Software (16)

System software performs the critical functions necessary to operate a computer at the most basic level. The fundamental form of system software is the operating system, which controls the overall operation of the computer.

Income Statement (8)

The Income statement summarizes the financial results of a firm's operations over a given period of time. Revenues- Expenses =Net Income

Viral marketing (16)

The Internet has also proven to be an effective medium for viral marketing, which attempts to get customers to communicate a firm's message to friends, family, and colleagues.

Net Present Value NPV (9)

The NPV of an investment proposal is found by adding the present values of all of its estimated future cash flows and subtracting the initial cost of the investment from the sum. A positive NPV means that the present value of the expected cash flows from the project is greater than the cost of the project.

Balance Sheet (8)

The balance sheet summarizes a firm's financial position at a specific point in time.

Cash Budget (9)

The cash budget is another important financial planning tool. Cash budgets normally cover a one-year period and show projected cash inflows and outflows for each month. Financial managers use cash budgets to get a better understanding of the timing of cash flows within the planning period.

Risk-return tradeoff (9)

The risk-return tradeoff suggests that sources and uses of funds that offer the potential for high rates of return tend to be more risky than sources and uses of funds that offer lower returns.

Liquid Asset (9)

a liquid asset is one that can be quickly converted into cash with little risk of loss

Cybermediary (16)

cybermediary—an Internet-based company that specializes in the secure electronic transfer of funds.

Electronic Bill Presentment (16)

electronic bill presentment and payment, which is another form of electronic payments. With biller-direct, consumers receive email reminders and then pay their bills at the company website.

RFID (16)

radio frequency identification (RFID) to improve the efficiency of their supply chains.

Risk (9)

risk refers to the degree of uncertainty about the actual outcome of a decision.