Ch 2 + 14
ethics random
Ethics is also related to the culture in which a business operates. In the United States, for example, it would be inappropriate for a businessperson to bring an elaborately wrapped gift to a prospective client on their first meeting—the gift could be viewed as a bribe. In Japan, however, it is considered impolite not to bring a gift. Experience with the culture in which a business operates is critical to understanding what is ethical or unethical. On the other hand, firms must also abide by the values and policies of global business.
ethical randomness
Factory closures are another ethical issue because factories usually employ hundreds of workers. Sometimes it is necessary to close a plant due to economic reasons. However, factory closures Page 41not only affect individual employees, but their communities as well. When an Electrolux factory moved from Webster City, Iowa, to Juarez, Mexico, the city of 8,000 people lost its main employer. This is having repercussions on other businesses in the area because more unemployed people mean fewer sales.
trial court
(whether in a court of general or limited jurisdiction and whether in the state or the federal system), two tasks must be completed. First, the court (acting through the judge or a jury) must determine the facts of the case. In other words, if there is conflicting evidence, the judge or jury must decide whom to believe. Second, the judge must decide which law or set of laws is pertinent to the case and must then apply those laws to resolve the dispute.
Conflict of Interest
A conflict of interest, one of the most common ethical issues identified by employees, exists when a person must choose whether to advance his or her own personal interests or those of others. To avoid conflicts of interest, employees must be able to separate their personal financial interests from their business dealings.
Consumer Relations
A critical issue in business today is business's responsibility to customers, who look to business to provide them with satisfying, safe products and to respect their rights as consumers.
Relations with owners and stockholders
Businesses must first be responsible to their owners, who are primarily concerned with earning a profit or a return on their investment in a company. In a small business, this responsibility is fairly easy to fulfill because the owner (or owners) personally manages the business or knows the managers well. In larger businesses, particularly corporations owned by thousands of stockholders, ensuring responsibility becomes a more difficult task. A business's obligations to its owners and investors, as well as to the financial community at large, include maintaining proper accounting procedures, providing all relevant information to investors about the current and projected performance of the firm, and protecting the owners' rights and investments. In short, the business must maximize the owners' investments in the firm.
Communications
Communications is another area in which ethical concerns may arise. False and misleading advertising, as well as deceptive personal-selling tactics, anger consumers and can lead to the failure of a business. Truthfulness about product safety and quality is also important to consumers. General Motors, Toyota, and Honda all faced fines for product quality issues and for not issuing recalls in a timely manner. In many of these situations, the companies were found to be slow on issuing recalls or making them well known, which resulted in accidents in some cases. Some companies fail to provide enough information for consumers about differences or similarities between products.
Abusive and intimidating behavior
Abusive or intimidating behavior is another common ethical problem for employees. These concepts can mean anything from physical threats, false accusations, profanity, insults, yelling, harshness, and unreasonableness to ignoring someone or simply being annoying; and the meaning of these words can differ by person—you probably have some ideas of your own. Abusive behavior can be placed on a continuum from a minor distraction to a disruption of the workplace. Abusive behavior is difficult to assess and manage because of diversity in culture and lifestyle. What does it mean to speak profanely? Is profanity only related to specific words or other such terms that are common in today's business world? If you are using words that are normal in your language but that others consider to be profanity, have you just insulted, abused, or disrespected them? Bullying is associated with a hostile workplace when a person or group is targeted and is threatened, harassed, belittled, verbally abused, or overly criticized. Bullying may create what some consider a hostile environment, a term generally associated with sexual harassment. Although sexual harassment has legal recourse, bullying has little legal recourse at this time.
employee relations
Another issue of importance to a business is its responsibilities to employees. Without employees, a business cannot carry out its goals. Employees expect businesses to provide a safe workplace, pay them adequately for their work, and keep them informed of what is happening in their company. They want employers to listen to their grievances and treat them fairly. Most organizations now recognize that the safety and satisfaction of their employees are critical ingredients in their success, and many strive to go beyond what is legally expected of them. Healthy, satisfied employees also supply more than just labor to their employers. Employers are beginning to realize the importance of obtaining input from even the lowest-level employees to help the company reach its objectives.
Sarbanes-Oxley Act
Criminalized securities fraud and strengthened penalties for corporate fraud. It also created an accounting oversight board that requires corporations to establish codes of ethics for financial reporting and to develop greater transparency in financial reports to investors and other interested parties. Additionally, the law requires top corporate executives to sign off on their firms' financial reports, and they risk fines and jail sentences if they misrepresent their companies' financial position.
Fairness and Honesty
Fairness and honesty are at the heart of business ethics and relate to the general values of decision makers. At a minimum, businesspersons are expected to follow all applicable laws and regulations. But beyond obeying the law, they are expected not to harm customers, employees, clients, or competitors knowingly through deception, misrepresentation, coercion, or discrimination. Honesty and fairness can relate to how the employees use the resources of the organization. In contrast, dishonesty is usually associated with a lack of integrity, lack of disclosure, and lying. One aspect of fairness relates to competition. Although numerous laws have been passed to foster competition and make monopolistic practices illegal, companies sometimes gain control over markets by using questionable practices that harm competition. For instance, the European Commission started an antitrust investigation into Google's practices to determine whether it was engaging in anticompetitive behavior. Several companies including Microsoft claimed that Google promoted its own search results over those of competitors in spite of their relevance. Because Google holds 90 percent of the search engine market in Europe, the controversy over how it is using its dominant position to remain ahead of competitors is not likely to die down. The European Union's Parliament has called for the breakup of Google to separate its search engine business from its other services.26 In many cases, the alleged misconduct not only can have monetary and legal implications but can also threaten reputation, investor confidence, and customer loyalty. In the case of Pool Corporation, the company had allegedly bullied pool manufacturers by threatening to refuse to distribute their products if they did business with other pool distributors. Such behavior is unacceptable. At the minimum, a business found guilty of anticompetitive practices will be forced to stop such conduct. However, many companies end up paying millions in penalties to settle allegations.
Random
However, it is important to understand that business ethics goes beyond legal issues. Ethical conduct builds trust among individuals and in business relationships, which validates and promotes confidence in business relationships. Establishing trust and confidence is much more difficult in organizations that have reputations for acting unethically. Thus, whether made in science, politics, sports, or business, most decisions are judged as right or wrong, ethical or unethical. Negative judgments can affect an organization's ability to build relationships with customers and suppliers, attract investors, and retain employees.
Dodd-Frank Wall Street Reform and Consumer Protection Act
In addition to new regulations for financial institutions, the legislation created a Consumer Financial Protection Bureau (CFPB) to protect consumers from complex or deceptive financial products. The Dodd-Frank Act contains 16 titles meant to increase consumer protection, enhance transparency and accountability in the financial sector, and create new financial agencies. In some Page 54ways, Dodd-Frank is attempting to improve upon provisions laid out in the Sarbanes-Oxley Act. For instance, Dodd-Frank takes whistleblower protection a step further by offering additional incentives to whistleblowers for reporting misconduct. If whistleblowers report misconduct that results in penalties of more than $1 million, the whistleblower will be entitled to a percentage of the settlement.85 Additionally, complex financial instruments must now be made more transparent so that consumers will have a better understanding of what these instruments involve. The act also created three new agencies: the Consumer Financial Protection Bureau (CFPB), the Office of Financial Research, and the Financial Stability Oversight Council. Although the CFPB was created to protect consumers, the other two agencies work to maintain stability in the financial industry so such a crisis will not recur in the future.86 Although it is too early to tell whether these regulations will serve to create widescale positive financial reform, the Dodd-Frank Act is certainly leading to major changes on Wall Street and in the financial sector.
generally accepted accounting principles (GAAP)
Manufacturing firms, service providers, and nonprofit organizations each use a different set of accounting principles or rules upon which the public accounting profession has agreed
Misuse of Company Resources
Misuse of company resources has been identified by the Ethics Resource Center as a leading issue in observed misconduct in organizations. Issues might include spending an excessive amount of time on personal e-mails, submitting personal expenses on company expense reports, or using the company copier for personal use. Part of the reason that American Apparel founder and CEO Dov Charney was fired was because an investigation discovered that he had allegedly misused company funds.19 While serious resource abuse can result in firing, some abuse can have legal repercussions. An Amtrak employee was found guilty of padding his expense report by over $3,300 for meals that did not occur. The employee was arrested, dismissed from Amtrak, and forced to make restitution.20 The most common way that employees abuse resources is by using company computers for personal use.
personal ethics
Personal ethics, on the other hand, relates to an individual's values, principles, and standards of conduct.
Laws of Property
Real property consists of real estate and everything permanently attached to it; personal property basically is everything else. Personal property can be further subdivided into tangible and intangible property. Tangible property refers to items that have a physical existence, such as automobiles, business inventory, and clothing. Intangible property consists of rights and duties; its existence may be represented by a document or by some other tangible item. Intellectual property refers to property, such as musical works, artwork, books, and computer software, that is generated by a person's creative activities. Copyrights protect the ownership rights on material (often intellectual property) such as books, music, videos, photos, and computer software. The creators of such works, or their heirs, generally have exclusive rights to the published or unpublished works for the creator's lifetime plus 70 years. Patents give inventors exclusive rights to their invention for 20 years. The most intense competition Page 48for patents is in the pharmaceutical industry. Most patents take a minimum of 18 months to secure. trademark is a brand (name, mark, or symbol) that is registered with the U.S. Patent and Trademark Office and is thus legally protected from use by any other firm.
Consumerism
The activities that independent individuals, groups, and organizations undertake to protect their rights as consumers
Business Relationships
The behavior of businesspersons toward customers, suppliers, and others in their workplace may also generate ethical concerns. Ethical behavior within a business involves keeping company secrets, meeting obligations and responsibilities, and avoiding undue pressure that may force others to act unethically. Managers in particular, because of the authority of their position, have the opportunity to influence employees' actions.
the right to safety
The right to safety means that a business must not knowingly sell anything that could result in personal injury or harm to consumers. Defective or dangerous products erode public confidence in the ability of business to serve society. They also result in expensive litigation that ultimately increases the cost of products for all consumers. The right to safety also means businesses must provide a safe place for consumers to shop.
misuse of time
Theft of time is a major area of misconduct observed in the workplace. One example of misusing time in the workplace is by engaging in activities that are not necessary for the job. For instance, many employees spend an average of one hour each day using social networking sites or watching YouTube. Time theft costs can be difficult to measure but are estimated to cost companies hundreds of billions of dollars annually. It is widely believed that the average employee steals 4.5 hours a week with late arrivals, leaving early, long lunch breaks, inappropriate sick days, excessive socializing, and engaging in personal activities such as online shopping and watching sports while on the job. All of these activities add up to lost productivity and profits for the employer—and relate to ethical issues in the area of time theft.
ledger
a book or computer file with separate sections for each account.
social responsibility
a business's obligation to maximize its positive impact and minimize its negative impact on society. ethics and social responsibility arent the same thing social responsibility is a broader concept that concerns the impact of the entire business's activities on society.
Agency
a common business relationship created when one person acts on behalf of another and under that person's control. Two parties are involved in an agency relationship: The principal is the one who wishes to have a specific task accomplished; the agent is the one who acts on behalf of the principal to accomplish the task. Authors, movie stars, and athletes often employ agents to help them obtain the best contract terms. An agency is a common business relationship created when one person acts on behalf of another and under that person's control. Two parties are involved in an agency relationship: The principal is the one who wishes to have a specific task accomplished; the agent is the one who acts on behalf of the principal to accomplish the task. Authors, movie stars, and athletes often employ agents to help them obtain the best contract terms.
quick ratio
a far more stringent measure of liquidity because it eliminates inventory, the least liquid current asset. It measures how well an organization can meet its current obligations without resorting to the sale of its inventory.
income statement
a financial report that shows an organization's profitability over a period of time—month, quarter, or year.
assets
a firm's economic resources, or items of value that it owns, such as cash, inventory, land, equipment, buildings, and other tangible and intangible things.
Current liabilities
a firm's financial obligations to short-term creditors, which must be repaid within one year.
mediation
a form of negotiation to resolve a dispute by bringing in one or more third-party mediators, usually chosen by the disputing parties, to help reach a settlement. The mediator suggests different ways to resolve a dispute between the parties. The mediator's resolution is nonbinding—that is, the parties do not have to accept the mediator's suggestions; they are strictly voluntary.
contract
a mutual agreement between two or more parties that can be enforced in a court if one party chooses not to comply with the terms of the contract. Many aspects of contract law are covered under the Uniform Commercial Code. handshake deal" is in most cases as fully and completely binding as a written, signed contract agreement. parts of contracts are called elements. Contractual capacity is the legal ability to enter into a contract. As a general rule, a court cannot enforce a contract if either party to the agreement lacks contractual capacity.
Uniform Commercial Code
a set of statutory laws covering several business law topics.
annual report,
a summary of the firm's financial information, products, and growth plans for owners and potential investors.
journal
a time-ordered list of account transactions.
accrued expenses account
all unpaid financial obligations incurred by an organization.
certified public accountant (CPA)
an individual who has been certified by the state in which he or she practices to provide accounting services ranging from the preparation of financial records and the filing of tax returns to complex audits of corporate financial records.
budget
an internal financial plan that forecasts expenses and income over a set period of time. It is not unusual for an organization to prepare separate daily, weekly, monthly, and yearly budgets. Think of a budget as a financial map, showing how the company expects to move from Point A to Point B over a specific period of time.
accounting equation
assets equal liabilities plus owners' equity.
current assets
assets that are used or converted into cash within the course of a calendar year.
right to be heard
assures consumers that their interests will receive full and sympathetic consideration when the government Page 37formulates policy. It also ensures the fair treatment of consumers who voice complaints about a purchased product.
product liability
businesses' legal responsibility for any negligence in the design, production, sale, and consumption of products. Product liability laws have evolved from both common and statutory law. Some states have expanded the concept of product liability to include injuries by products whether or not the producer is proven negligent. Under this strict product liability, a consumer who files suit because of an injury has to prove only that the product was defective, that the defect caused the injury, and that the defect made the product unreasonably dangerous.
certified management accountants (CMAs)
by passing a rigorous examination by the Institute of Management Accountants.
current ratio
calculated by dividing current assets by current liabilities.
return on equity
calculated by dividing net income by owners' equity, shows how much income is generated by each $1 the owners have invested in the firm. Obviously, a low return on equity means low stockholder returns and may indicate a need for immediate managerial attention. Because some assets may have been financed with debt not contributed by the owners, the value of the owners' equity is usually considerably lower than the total value of the firm's assets.
liquidity ratios
compare current (short-term) assets to current liabilities to indicate the speed with which a company can turn its assets into cash to meet debts as they fall due. High liquidity ratios may satisfy a creditor's need for safety, but ratios that are too high may indicate that the organization is not using its current assets efficiently. Liquidity ratios are generally best examined in conjunction with asset utilization ratios because high turnover ratios imply that cash is flowing through an organization very quickly—a situation that dramatically reduces the need for the type of reserves measured by liquidity ratios.
sustainability
conducting activities in such a way as to provide for the long-term well-being of the natural environment, including all biological entities. Sustainability involves the interaction among nature and individuals, organizations, and business strategies and includes the assessment and improvement of business strategies, economic sectors, work practices, technologies, and lifestyles so that they maintain the health of the natural environment. In recent years, business has played a significant role in adapting, using, and maintaining the quality of sustainability.
liabilities
debts that a firm owes to others.
Civil law
defines all the laws not classified as criminal, and it specifies the rights and duties of individuals and organizations (including businesses). Violations of civil law may result in fines but not imprisonment. The primary difference between criminal and civil law is that criminal laws are enforced by the state or nation, whereas civil laws are enforced through the court system by individuals or organizations.
Business LAw
efers to the rules and regulations that govern the conduct of business. Problems in this area come from the failure to keep promises, misunderstandings, disagreements about expectations, or, in some cases, attempts to take advantage of others. The regulatory environment offers a framework and enforcement system to provide a fair playing field for all businesses. The regulatory environment is created based on inputs from competitors, customers, employees, special interest groups, and the public's elected representatives. Lobbying by pressure groups who try to influence legislation often shapes the legal and regulatory environment.
the right to choose
ensures that consumers have access to a variety of goods and services at competitive prices. The assurance of both satisfactory quality and service at a fair price is also a part of the consumer's right to choose.
owners' equity
equals assets minus liabilities and reflects historical values.
statement of cash flows
explains how the company's cash changed from the beginning of the accounting period to the end.
Social responsibility
financial, legal compliance, ethics, and philanthropy OR economic, legal, ethical, and voluntary (including philanthropic) Earning profits is the economic foundation, and complying with the law is the next step. However, a business whose sole objective is to maximize profits is not likely to consider its social responsibility, although its activities will probably be legal. (We looked at ethical responsibilities in the first half of this chapter.) Finally, voluntary responsibilities are additional activities that may not be required but that promote human welfare or goodwill. Legal and economic concerns have long been acknowledged in business, and voluntary and ethical issues are being addressed by most firms. Social responsibility is a dynamic area with issues changing constantly in response to society's demands. There is much evidence that social responsibility is associated with improved business performance. Consumers are refusing to buy from businesses that receive publicity about misconduct. A number of studies have found a direct relationship between social responsibility and profitability as well as a link that exists between employee commitment and customer loyalty—two major concerns of any firm trying to increase profits.53
master budgets
for the entire firm, many also prepare budgets for smaller segments of the organization such as divisions, departments, product lines, or projects. "Top-down" master budgets begin at the upper management level and filter down to the individual department level, while "bottom-up" budgets start at the department or project level and are combined at the chief executive's office. Generally, the larger and more rapidly growing an organization, the greater will be the likelihood that it will build its master budget from the ground up.
Professional codes of ethics codes of ethics
formalized rules and standards that describe what a company expects of its employees.
the right to be informed
gives consumers the freedom to review complete information about a product before they buy it. This means that detailed information about ingredients, risks, and instructions for use are to be printed on labels and packages. When companies mislead consumers about the benefits of their products, then they infringe on consumers' rights to be informed.
breach of contract
he failure or refusal of a party to a contract to live up to his or her promises.
ethical issue
identifiable problem, situation, or opportunity that requires a person to choose from among several actions that may be evaluated as right or wrong, ethical or unethical.
implied warranty
imposed on the producer or seller by law, although it may not be a written document provided at the time of sale.
mini-trial
in which both parties agree to present a summarized version of their case to an independent third party. That person then advises them of his or her impression of the probable outcome if the case were to be tried. Representatives of both sides then attempt to negotiate a settlement based on the advisor's recommendations.
debt to total assets ratio
indicates how much of the firm is financed by debt and how much by owners' equity.
arbitration
involves submission of a dispute to one or more third-party arbitrators, usually chosen by the disputing parties, whose decision usually is final. Arbitration differs from mediation in that an arbitrator's decision must be followed, whereas a mediator merely offers suggestions and facilitates negotiations. Cases may be submitted to arbitration because a contract—such as a labor contract—requires it or because the parties agree to do so. Some consumers are barred from taking claims to court by agreements drafted by banks, brokers, health plans, and others. Instead, they are required to take complaints to mandatory arbitration. Arbitration can be an attractive alternative to a lawsuit because it is often cheaper and quicker, and the parties frequently can choose arbitrators who are knowledgeable about the particular area of business at issue.
fraud
is a purposefully unlawful act to deceive or manipulate to damage others. Thus, in some cases, a tort may also represent a violation of criminal law. Health care fraud has become a major issue in the courts.
Double-entry bookkeeping
is a system of recording and classifying business transactions in separate accounts in order to maintain the balance of the accounting equation. credits are deducted and debits are added
Cash from operating activities
is calculated by combining the changes in the revenue accounts, expense accounts, current asset accounts, and current liability accounts. This category of cash flows includes all the accounts on the balance sheet that relate to computing revenues and expenses for the accounting period.
earnings per share
is calculated by dividing net income or profit by the number of shares of stock outstanding. This ratio is important because yearly changes in earnings per share, in combination with other economy-wide factors, determine a company's overall stock price. When earnings go up, so does a company's stock price—and so does the wealth of its stockholders.
cash from financing activities
is calculated from changes in the long-term liability accounts and the contributed capital accounts in owners' equity.
Cash from investing activities
is calculated from changes in the long-term or fixed asset accounts.
private court system
is similar to arbitration in that an independent third party resolves the case after hearing both sides of the story. Trials in private courts may be either informal or highly formal, depending on the people involved. Businesses typically agree to have their disputes decided in private courts to save time and money.
Corporate citizenship
is the extent to which businesses meet the legal, ethical, economic, and voluntary responsibilities placed on them by their various stakeholders. It involves the activities and organizational processes adopted by businesses to meet their social responsibilities.
Revenue
is the total amount of money received (or promised) from the sale of goods or services, as well as from other business activities such as the rental of property and investments. Nonbusiness entities typically obtain revenues through donations from individuals and/or grants from governments and private foundations.
bookkeeping
is typically limited to the routine, day-to-day recording of business transactions. Bookkeepers are responsible for obtaining and recording the information that accountants require to analyze a firm's financial position. They generally require less training than accountants.
a business's primary obligation to its owners and investors is to
maximize the owners' investments in the firm
asset utilization ratios
measure how well a firm uses its assets to generate each $1 of sales
Federal Trade Commission
most influences business activities related to questionable practices that create disputes between businesses and their customers. Although the FTC regulates a variety of business practices, it allocates a large portion of resources to curbing false advertising, misleading pricing, and deceptive packaging and labeling. When it receives a complaint or otherwise has reason to believe that a firm is violating a law, the FTC issues a complaint stating that the business is in violation.
return on assets
net income divided by assets, shows how much income the firm produces for every dollar invested in assets. A company with a low return on assets is probably not using its assets very productively—a key managerial failing. For its construction, the return on assets calculation requires data from both the income statement and the balance sheet.
profit margin
net income divided by sales. hows the overall percentage of profits earned by the company. It is based solely upon data obtained from the income statement. The higher the profit margin, the better the cost controls within the company and the higher the return on every dollar of revenue.
Criminal law
not only prohibits a specific kind of action, such as unfair competition or mail fraud, but also imposes a fine or imprisonment as punishment for violating the law. A violation of a criminal law is thus called a crime. Criminal and civil laws are derived from four sources: the Constitution (constitutional law), precedents established by judges (common law), federal and state statutes (statutory law), and federal and state administrative agencies (administrative law). Federal administrative agencies established by Congress control and influence business by enforcing laws and regulations to encourage competition and protect consumers, workers, and the environment. The Supreme Court is the ultimate authority on legal and regulatory decisions for appropriate conduct in business.
appellate court
on the other hand, deals solely with appeals relating to the interpretation of law. Thus, when you hear about a case being appealed, it is not retried but rather reevaluated. Appellate judges do not hear witnesses but instead base their decisions on a written transcript of the original trial. Moreover, appellate courts do not draw factual conclusions; the appellate judge is limited to deciding whether the trial judge made a mistake in interpreting the law that probably affected the outcome of the trial. If the trial judge made no mistake (or if mistakes would not have changed the result of the trial), the appellate court will let the trial court's decision stand. If the appellate court finds a mistake, it usually sends the case back to the trial court so that the mistake can be corrected. Correction may involve the granting of a new trial. On occasion, appellate courts modify the verdict of the trial court without sending the case back to the trial court.
times interest earned ratio
operating income divided by interest expense, is a measure of the safety margin a company has with respect to the interest payments it must make to its creditors. A low times interest earned ratio indicates that even a small decrease in earnings may lead the company into financial straits.
organizational ethics
organizational ethics initiatives have been supportive of many positive and diverse organizational objectives, such as profitability, hiring, employee satisfaction, and customer loyalty.42 Conversely, lack of organizational ethics initiatives and the absence of workplace values such as honesty, trust, and integrity can have a negative impact on organizational objectives and employee retention. According to one study, three of the most common factors that Page 34executives give for why turnover increases are employee loss of trust in the company, a lack of transparency among company leaders, and unfair employee treatment.
dividends per share
paid by the corporation to the stockholders for each share owned. The payment is made from earnings after taxes by the corporation but is taxable income to the stockholder. Thus, dividends result in double taxation: The corporation pays tax once on its earnings, and the stockholder pays tax a second time on his or her dividend income.
Sherman Antitrust Act
passed in 1890 to prevent businesses from restraining trade and monopolizing markets, condemns "every contract, combination, or conspiracy in restraint of trade."
bribes
payments, gifts, or special favors intended to influence the outcome of a decision. A bribe benefits an individual or a company at the expense of other stakeholders. Companies that do business overseas should be aware that bribes are a significant ethical issue and are, in fact, illegal in many countries. In the United States, the Foreign Corrupt Practices Act imposes heavy penalties on companies found guilty of bribery. After bribery was discovered among its Mexican branch, Walmart underwent a lengthy Justice Department investigation. Its own internal probe into the matter cost the company $439 million
Plagiarism
presenting someone else's work as your own without mentioning the source—is another ethical issue. As a student, you may be familiar with plagiarism in school—for example copying someone else's term paper or quoting from a published work or Internet source without acknowledging it. In business, an ethical issue arises when an employee copies reports or presents the work or ideas of others as his or her own. A manager attempting to take credit for a subordinate's ideas is engaging in another type of plagiarism.
tort
private or civil wrong other than breach of contract
debt utilization ratios
provide information about how much debt an organization is using relative to other sources of capital, such as owners' equity.
Profitability ratios
ratios that measure the amount of operating income or net income an organization is able to generate relative to its assets, owners' equity, and sales .Common profitability ratios include profit margin, return on assets, and return on equity.
accounts receivable
refers to money owed the company by its clients or customers who have promised to pay for the products at a later date. Accounts receivable usually includes an allowance for bad debts that management does not expect to collect. The bad-debts adjustment is normally based on historical collections experience and is deducted from the accounts receivable balance to present a more realistic view of the payments likely to be received in the future, called net receivables. Inventory may be held in the form of raw materials, work-in-progress, or finished goods ready for delivery.
Managerial accounting
refers to the internal use of accounting statements by managers in planning and directing the organization's activities. Perhaps management's greatest single concern is cash flow
Long-term or fixed assets
represent a commitment of organizational funds of at least one year. Items classified as fixed include long-term investments, plant and equipment, and intangible assets, such as corporate "goodwill," or reputation, as well as patents and trademarks.
gross income
revenues minus the cost of goods sold required to generate the revenues.
receivables turnover
sales divided by accounts receivable, indicates how many times a firm collects its accounts receivable in one year. It also demonstrates how quickly a firm is able to collect payments on its credit sales.. a type of asset utilization ratio
total asset turnover
sales divided by total assets, measures how well an organization uses all of its assets in creating sales.
inventory turnover
sales divided by total inventory, indicates how many times a firm sells and replaces its inventory over the course of a year. A high inventory turnover ratio may indicate great efficiency but may also suggest the possibility of lost sales due to insufficient stock levels.
express warranty
stipulates the specific terms the seller will honor. Many automobile manufacturers, for example, provide three-year or 36,000-mile warranties on their vehicles, during Page 46which period they will fix any and all defects specified in the warranty.
Clayton Act
t prohibits price discrimination, tying and exclusive agreements, and the acquisition of stock in another corporation when the effect may be to substantially lessen competition or tend to create a monopoly. In addition, the Clayton Act prohibits members of one company's board of directors from holding seats on the boards of competing corporations. The act also exempts farm cooperatives and labor organizations from antitrust laws.
liquidity
that is, how quickly each could be turned into cash
Whistleblowing
the act of an employee exposing an employer's wrongdoing to outsiders, such as the media or government regulatory agencies. However, more companies are establishing programs to encourage employees to report illegal or unethical practices internally so that they can take steps to remedy problems before they result in legal action or generate negative publicity. Unfortunately, whistleblowers are often treated negatively in organizations. The government therefore tries to encourage employees to report observed misconduct. Congress has also taken steps to close a legislative loophole in whistleblowing legislation that has led to the dismissal of many whistleblowers. In 2010, Congress passed the Dodd-Frank Act, which includes a "whistleblower bounty program." The Securities and Exchange Commission can now award whistleblowers between 10 and 30 percent of monetary sanctions over $1 million. The hope is that incentives will encourage more people to come forward with information regarding corporate misconduct. The largest whistleblower reward to date has been $30 million. The SEC felt that the fraud would have gone undetected if not for the whistleblower and is hoping this reward incentivizes other employees to step forward when they observe fraud.
Accounts payable
the amount a company owes to suppliers for goods and services purchased with credit.
cost of goods sold
the amount of money a firm spent to buy or produce the products it sold during the period to which the income statement applies.
Expenses
the costs incurred in the day-to-day operations of an organization.
accounting cycle
the four-step procedure of an accounting system: examining source documents, recording transactions in an accounting journal, posting recorded transactions, and preparing financial statements.
jurisdiction
the legal power of a court, through a judge, to interpret and apply the law and make a binding decision in a particular case. In some instances, other courts will not enforce the decision of a prior court because it lacked jurisdiction. Federal courts are granted jurisdiction by the Constitution or by Congress. State legislatures and constitutions determine which state courts hear certain types of cases. Courts of general jurisdiction hear all types of cases; those of limited jurisdiction hear only specific types of cases. The Federal Bankruptcy Court, for example, hears only cases involving bankruptcy. There is some combination of limited and general jurisdiction courts in every state.
cash flow
the movement of money through an organization over a daily, weekly, monthly, or yearly basis.
Business Ethics
the principles and standards that determine acceptable conduct in business organizations. elates to an individual's or a work group's decisions that society evaluates as right or wrong
depreciation
the process of spreading the costs of long-lived assets such as buildings and equipment over the total number of accounting periods in which they are expected to be used. general and administrative expense
accounting
the recording, measurement, and interpretation of financial information.
Legality
the state or condition of being lawful. For an otherwise binding contract to be enforceable, both the purpose of and the consideration for the contract must be legal. A contract in which a bank loans money at a rate of interest prohibited by law, a practice known as usury, would be an illegal contract, for example. The fact that one of the parties may commit an illegal act while performing a contract does not render the contract itself illegal, however.
Net income
the total profit (or loss) after all expenses, including taxes, have been deducted from revenue; also called net earnings.
per share data
to compare the performance of one company with another on an equal, or per share, basis. Generally, the more shares of stock a company issues, the less income is available for each share.
private accountants
to prepare and analyze their financial statements. With titles such as controller, tax accountant, or internal auditor, private accountants are deeply involved in many of the most important financial decisions of the organizations for which they work.
Accountants
usually complete course work beyond their basic four- or five-year college accounting degrees. This additional training allows accountants not only to record financial information, but to understand, interpret, and even develop the sophisticated accounting systems necessary to classify and analyze complex financial information. Accountants summarize the information from a firm's business transactions in various financial statements (which we'll look at in a later section of this chapter) for a variety of stakeholders, including managers, investors, creditors, and government agencies.
lawsuits,
where one individual or organization takes another to court using civil laws. The legal system, therefore, provides a forum for businesspeople to resolve disputes based on our legal foundations. The courts may decide when harm or damage results from the actions of others.
Forensic accounting,
which is accounting that is fit for legal review. It involves analyzing financial documents in search of fraudulent entries or financial misconduct. Functioning as much like detectives as accountants, forensic accountants have been used since the 1930s. In the wake of the accounting scandals of the early 2000s, many auditing firms are rapidly adding or expanding forensic or fraud-detection services. Additionally, many forensic accountants root out evidence of "cooked books" for federal agencies like the Federal Bureau Page 269of Investigation or the Internal Revenue Service. The Association of Certified Fraud Examiners, which certifies accounting professionals as certified fraud examiners (CFEs), has grown to more than 75,000 members.
