Small Business Management Exam #3

cash accounting

The one essential element of an accounting system is ____ _____ that is accurate, easy to use, and tracks all checks written and all deposits made

gain on investment

The percentage amount that the payout of an investment differs from original cost: calculated as (payout − investment + dividends) /investment.

cost of capital

The percentage cost of obtaining future funds.

investing activities

The purchase and sale of land, buildings, equipment, and securities.

optimum capital structure

The ratio of debt to equity that provides the maximum level of profits.

processing float

delays in delivering checks from the writer of the check to the recipient's bank

availability float

delays in transferring money among banks due to internal procedures

larceny and embezzlement

methods employees use to steal cash after it has been received and recorded in your books.

the amount to be bought

the amount to be used + the desired ending amount - the beginning amount

purposes

two _________ of money: 1) to make exchanges, 2) to keep track of wealth

skimming

the practice of "pocketing" money from customers and hiding the theft by not recording the sale

total revenue

total variable cost + total fixed cost + desired profit =

current

used or paid within one year

overdraft

A negative balance in a depositor's bank account.

angel investor

A wealthy individual who invests in companies in relatively early stages of development.

noncash incentives

Rewards that do not require payment of cash, such as stock options, compensating time off, or added vacation days.

net present value analysis

A decision simplification method with the concept that a dollar to be received right now has more utility (value) than does a dollar to be received at some time in the future. Only cash flows are considered in the decision making.

multi-step

A form of income statement that lists revenues from operations separately from other income and gains.

financial accounting

A formal, rule-based set of accounting principles and procedures intended for use by outside owners, investors, banks, and regulators.

managerial accounting

A forward-looking accounting method that is specifically intended to be used by managers for planning, directing, and controlling a business.

limited partnership

A legal form of business organization that is created by filing required documentation with a state government; one or more partners may have no liability for the debts and actions of the partnership. At least one party IS fully liable.

tax abatement

A legal reduction in taxes by a government. primarily to encourage specific activities that are expected to improve blighted areas or to provide additional employment.

CVP analysis

A managerial accounting technique which looks at the fixed and variable costs of a business to arrive at a number of unit sales (volume) to maximize profits.

liquidity

A measure of how quickly a company can raise money through internal sources by converting assets to cash. A measure of the ability of a business to meet both short-term and long-term obligations.

financial leverage

A measure of the amount of debt relative to total investment.

timing purchases

A method of controlling the timing of cash outflows that is invisible to suppliers and vendors.

discounts for prompt payment

A reduction in sales price provided to credit customers for paying outstanding amounts in a timely manner.

charge back

A reduction in the bank account of a merchant by a credit card company.

cash disbursements budget

A schedule of the amounts and timings of payments of cash out of a business.

cash receipts budget

A schedule of the amounts and timings of the receipt of cash into a business.

cost of goods sold budget

A schedule that shows the predicted cost of product actually sold during the accounting period.

financial management

A set of theories and techniques used to optimize the receipt and use of capital assets.

crowdfunding

A site where you post your business idea, along with descriptions, photos, and if at all possible a video about your business. You set a gift target goal, say $10,000 and a deadline (like 30 days).

nonsufficient funds

A situation that occurs when a check is returned to a depositor because the writer of the check did not have a bank available balance equal to or greater than the amount of the check.

cash flow statement

A statement of the sources and uses of cash in a business for a specific period of time.

balance sheet

A statement of what a business owns (assets), what it owes to others (liabilities), and how much value the owners have invested in it (equity).

income statement

A statement that lists revenues and expenses and shows the amount of profit a business makes for a specified period of time.

collateral

Something of value given or pledged as security for payment of a loan; collateral may consist of financial instruments, such as stocks, bonds, and negotiable paper, or of physical goods, such as trucks, machinery, land, or buildings.

accuracy

The primary reason to acquire and use a computerized accounting system is to ensure the ___________ of your accounting information.

record keeping

The primary value that accounting produces for owners and managers is that of _______ _______.

variance analysis

The process of determining the effect of price and quantity changes on revenues and expenses.

balance sheet limitations

1) all values listed in a balance sheet are historical values, 2) certain assets and liabilities are omitted, and 3) estimates can be significantly wrong.

master budget

A budget, also referred to as a comprehensive budget, consists of sets of budgets that detail all projected receipts and spending for the budgeted period.

sole proprietorship

A business owned by a single individual who is responsible for all debts and claims against the business.

credit reporting agency

A business that collects, collates, and reports information concerning an entity's use of debt.

financial flexibility

A business's ability to manage cash flows in such a manner that the company can respond appropriately to unexpected opportunities and needs.

differential revenues and expenses

A decision simplification model that comprises estimating the changes in revenues and expenses from current operating results that will occur if each alternative is taken

expense

A decrease in owners' equity caused by consuming your product or service.

growth trap

A financial crisis that is caused by a business growing faster than it can be financed.

budget

A financial plan for the future, based on a single level of operations; a quantitative expression of the use of resources necessary to achieve a business's strategic goals.

single-step

A form of income statement that lists all revenues and gains together, then lists all expenses and losses together

operating activities

Activities involved in producing and selling goods and services.

financing activities

Activities through which cash is obtained from and paid to lenders, owners, and investors.

bank

Add (subtract) to the ____ balance those things that you know about your account that the bank does not know.

book

Add (subtract) to your____ balance those things that the bank knows about your account that you do not know until you receive the bank statement.

payables

Amounts owed to vendors for merchandise or services purchased on credit

receivables

Amounts that are owed to a business for merchandise that was sold on credit

MACRS

An Internal Revenue Service acronym for the Modified Accelerated Cost Recovery System that lets taxpayers depreciate more of the cost earlier in the life of a capital expense

illiquid

An ________ asset cannot be sold quickly without suffering a significant discount from its true value

money

An accepted medium of exchange.

tax accounting

An accounting approach based on specific accounting requirements set by governmental taxing agencies.

activity-based cost estimates

An accounting method which assigns costs based on the different types of work a business does in order to sell a particular product or service.

reconciling

An accounting process that identifies the causes of all differences between book and bank balances.

clearinghouse

An entity that processes checks and electronic fund transfers for banks and other financial organizations.

revenue

An increase in owners' equity caused by selling your product or service.

foundation

An institution to which private wealth is contributed and from which private wealth is distributed for public purposes.

community development organization

An organization authorized by the SBA to make insured loans to small businesses that are expected to increase economic activity within a specific geographic area.

accelerator

An organization that supports start-up technology businesses by providing inexpensive office space, a variety of support services, and resources; most are associated with universities.

short-term debt

Any debt that must be paid in less than one year from the date of the financial statement on which it is reported. Fully transferable.

13000

Any gift that exceeds ________ is subject to gift tax

bearer

Any person or business entity who possesses a security.

external (cost) factors

Aspects of the world outside the business which could cause the business's costs to change. Ex: inflation, to changes in supply and demand, to economic shocks such as war.

internal (cost) factors

Aspects or choices within the business which could cause the business's costs to change.

cash equivalents

Assets that may be quickly converted to cash.

factoring receivables

Borrowing money secured by a firm's accounts receivable.

direct statement

Cash flow statement that is developed solely from the cash records of the business (only those things bought and sold) and does not make any reconciliation to the income statement.

deposits and progress payments

Cash payments received before product is completed or delivered.

financial statements

Formal summaries of the content of an accounting system's records of transactions.

character, capacity, conditions, collateral

Four Cs of borrowing

grants

Gifts of money made to a business for a specific purpose.

pro forma

Latin for "in the form of" when used to describe financial statements, indicates estimated or hypothetical information.

liabilities

Legal obligations to give up things of value in the future.

profitability ratios

Measures management effectiveness in creating wealth from sales and from invested funds

activity ratios

Measures of how productive a particular asset was in producing sales activity

leverage ratios

Measures that indicate the relative risk that a business setback could cause bankruptcy

liquidity ratios

Measures the business's ability to pay debts and expenses that are due in the current accounting period

equity capital

Money contributed to the businesses in return for part owner-ship of the business.

outside equity

Money from selling part of your business to people who are not and will not be involved in the management of the business.

demand deposits

Money held in checking and savings accounts.

marketable securities

Money held in checking and savings accounts.

cash

Money that is immediately available to be spent.

multi-step

Most owners and managers of small businesses prefer the _____ _____ format because of its greater detail.

30, 90

Often businesses step up collection efforts when the receivables are more than __ days overdue, with many businesses treating receivables more than __ days old as delinquent

dividends

Payments of profits to the owners of corporations.

trade discounts

Percentage discounts from gross invoice amounts provided to encourage prompt payment.

small business investment companies

Private businesses that are authorized to make SBA insured loans to start-ups and small businesses.

depreciation

Regular and systematic reduction in income that transfers asset value to expense over time.

noncore projects

Revenue-producing tasks and activities related to, but not part of, the primary strategy of a business.

second

The ____ step in budgeting is to plan for inventory purchases.

first

The _____ step in budgeting is to make a forecast of your future sales (sales budget)

financial strength

The ability of a business to survive adverse financial events.

going concern concept

The accounting concept that a business is expected to continue in existence for the foreseeable future.

profit

The amount that revenues exceed expenses.

currency

The bills and coins printed by governments to represent money.

business entity concept

The concept that a business has an existence separate from that of its owners.

articulate

The concept that information flows from the income statement through the statements of retained earnings and owners' equity to the balance sheet.

variance

The difference between an actual and budgeted revenue or cost.

owners' equity

The difference between assets and liabilities of a business.

balance sheet

The final step in preparing a master budget is to prepare a ________ _____ for each accounting period

outside

The greatest value of financial accounting for small business owners and managers is reporting the results of operations and the financial condition of the business to entities _______ the business.

economy of scale

The idea that it is cheaper (per item) to make many of an item than few.

liquidity, financial flexibility, financial strength

The information in the balance sheet is used to determine the _______, _________ _________, and ______ _______ of the business. (LFF)

quantity, cost

The labor budget shows both the______ and _____ of labor needed to meet output goals.

risk

The level of probability that an investment will not produce expected gains.

operating income

The most used item on the income statement. It represents just how well management achieved sales and controlled costs to produce profits. Lenders use this amount to determine how much debt a business can support.

cash-to-cash cycle

The time that is required for a business to acquire resources, convert them into product, sell the product, and receive cash from the sale. (Also called operating cycle)

cost

The value given up to obtain something that you want.

current ratio

The value of current assets divided by current liabilities.

bounded rationality models

Theories based on the assumption of limited human abilities are called _______

variable costs

Those costs that change with each unit produced, for example, raw materials.

fixed costs

Those costs that remain constant regardless of quantity of output, for example, rent.

accurate, relevant

To be useful, information must be ________ and _________.

difersify

To invest in multiple investments of differing risk profiles for the purpose of reducing overall investment risk.

partnership

Two or more people cooperating to conduct a business enterprise.

what, when

Two typical difficulties that arise in understanding and interpreting the income statements: 1) disagreements about _____ exactly should be reported as revenue & 2) disputes over _____ to recognize revenues

fair credit reporting act

U.S. federal legislation specifying consumers' rights vis-à-vis credit reporting agencies.

financial risk

Uncertainty of returns; the probability of losing money.

bootstrapping

Using funds generated by business operations to capitalize growth.

gaming the payment process

Using methods to appear to be paying bills on time, when in fact payment is being delayed or avoided.

debt capital

Valuable assets or services donated to the business without any obligation to repay or give up any ownership interest.

gift

Valuable assets or services donated to the business without any obligation to repay or give up any ownership interest.

favorable

______ variances would result in profits being greater than budgeted

unfavorable

______ variances would result in profits being less than budgeted

5 common financial statements

balance sheet, income statement, owners' equity statement, cash flow statement, retained earnings statement

policies

bank _______ determine in large amount the difference between bank ledger balance and bank available balance

more

business planning uses _____ detail than break-even analysis

long-term

convert to cash in a period greater than one year

cash budget

identifies when, how, and why cash is expected to come into the business, and when, how, and why it is expected to leave.

phony disbursements

most commonly accomplished by making fake invoices that are subsequently paid by your ordinary cash disbursement procedure

50

most lenders will not loan money if your debt-equity ratio exceeds ____ percent

LLC

primary advantage of _________: owners may easily choose whether to be taxed as an entity or have tax items pass through

profitability and leverage

ratios most important once the firm reaches break-even point

activity

ratios most important once the initial trial and error period is over

liquidity

ratios most important with start ups

loan convenants

requirements that specify minimum net worth be maintained, a specific debt-to-equity ratio not be exceeded, no dividends be paid to stockholders, executive salaries not exceed a specified amount, no capital assets be acquired or disposed of without the concurrence of the lender, and so on.

interest

A charge for the use of money, usually figured as a percentage of the principal.

corporation

A legal "artificial" entity that is formed by filing specific documents with a state government.

LLC

A legal form of business organization that is created by filing required documentation with a state government. They have a choice, under federal tax law, of being taxed as either corporations or partnerships.

debt

A legal obligation to pay money in the future.

float

Delays in the movement of money among depositors and banks.

tax credits

Direct reductions in the amount of taxes that must be paid, dependent upon meeting some legal criteria.

commercial paper

Notes issued by credit-worthy corporations.

break-even point

The point at which total costs equal gross revenue.

consignment

The practice of accepting goods for resale, without taking ownership of them and without being responsible to pay prior to their being sold.

barter

The practice of trading goods and services without the use of money.

record keeping system

The primary criteria for a small business's ______ ______ ______ are: (1) simplicity of use, (2) accuracy of detail, (3) timeliness of reports, (4) understandability to the manager of the business, and (5) security of data.

return on equity

The ratio of profits to owner investment in a business.

accounting equation

The statement that assets equal liabilities plus owners' equity (assets = liabilities + owners' equity).

retained earnings

The sum of all profits and losses, less all dividends paid since the beginning of the business.

company book balance

The sum of cash inflows and cash outflows recorded in the firm's accounting records.

bank ledger balance

The sum of deposits and withdrawals recorded in a bank's accounting records.

bank available balance

The sum of money that has actually been received and paid out of a depositor's account.