MGMT 470 Final Exam Review (Chapters 11-18)
Value items using these methods:
- Acquisition cost - Replacement cost - Fair market value
THE FOUR ACCOUNTING METHODS TO VALUE CAPITAL ASSETS
1. Book value 2. Disposal value 3. Replacement value 4. Fair market value
THE 3 MAIN MANAGERIAL ACCOUNTING PROCESSES
1. Planning 2. Directing 3. Controlling
FACTORING RECEIVABLES
A company will usually pay you about 75 to 80 percent of the total amount that can be collected. The factor then collects the receivables. The difference between the gross amount of the receivables and the amount that is ultimately collected is the factor's profit margin.
SURETY BONDS
An agreement with an insurance or bonding company that will pay a specified amount in the event that the entity bonded fails to comply with specified contractual requirements.
SHORT-TERM ASSETS
An asset that is to be sold, converted to cash, or liquidated to pay for liabilities within one year
LONG-TERM ASSETS
An asset that will still have value to the business more than one year from now or a liability that will still be owed more than one year from now.
The Four Cs of Borrowing
Character, Capacity, Conditions, Collateral
PRICE GOUGING
Charging an outrageously high price for something.
PRICE ELASTICITY HAS TO DO WITH HOW....
Essential a product is to customers
MONEY DEFINITION
Is a medium of exchange accepted by the community, meaning it's what people buy things with and sell things for. - It is a form of information.
BUNDLE OF SATISFACTIONS
Means the actual product. The product that fulfills the need in the market, the need in for which the business was started. It is the product's guarantee or, overall, goal.
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.
ELASTIC PRICING
Product for which there are any number of substitutes and for which a change in price makes a difference in quantity purchased.
AUDIT TRAIL
Records all entries and changes to the accounting system in order to facilitate the identification and correction of errors.
FACTORING
Selling the rights to collect accounts receivable to an entity outside your business.
PRESTIGE PRICING
Setting a price above that of the competition to indicate your product is a status symbol. EX: Considered a status symbol, such as a Rolex watch or a Mercedes automobile.
SKIMMING
Setting a price at the highest level the market will bear, usually because there is no competition at the time.
EMPOWERMENT ZONES
Some major metropolitan areas offer specialized zones where special support is provided to companies locating there. - May be economic development zones. -These zones, are often in economically depressed areas, offer businesses low- cost space and tax advantages for locating there.
WEIGHTED AVERAGE COST OF CAPITAL
The expected average future cost of funds.
Just-in-time inventory:
The practice of purchasing and accepting delivery of inventory only after it has been sold to the final customer - The ultimate extension of pull-through processing
DEBT-TO-EQUITY RATIO
measures your company's total debt relative to the amount originally invested by the owners and the earnings that have been retained over time.
HOLD HARMLESS AGREEMENT EXAMPLE
One party is giving up legal rights to sue or otherwise enforce his or her rights. Courts tend not to like such agreements, so again the best chance to have an agreement that holds up in court is to have a lawyer draft it. If you see such a clause in a contract, let your lawyer advise you what to do.
INELASTIC PRICING
Product for which there are few substitutes and for which a change in price makes very little difference in quantity purchased.
ACCOUNTS RECEIVABLE
Records if you provide credit to your customers. - Money owed your business by customers (Often the key to survival)
MULTICHANNEL MARKETING
Refers to giving your customers multiple ways of contacting you—phone, website, or mail-in order forms, for example.
ODD-EVEN PRICING
Setting a price that ends in the number 5, 7, or 9. - For example, don't charge $100; charge $99.99 (or $99.97 or $99.95).
CAPTIVE PRICING
Setting the price for an item relatively low and then charging much higher prices for the expendables it uses. EX: Computer printers are usually priced low for the technology—some-times even thrown in for free when you buy a computer—but the cost of the replacement ink cartridges is high. By the time you purchase three or four, you've spent more money for them than the price of the printer.
Here is where the law of supply and demand relates to business:
- When supply is adequate, prices are stable. - If supply shrinks, prices go up. - If demand suddenly grows, prices are likely to go up. - Reasonable increases are expected, but beware of price gouging.
THE THREE MAJOR TYPES OF CASH FLOWS
1. Cash can be obtained by selling the products and services of the business and collecting cash from customers (This is called cash flow from operations) 2. Cash can be obtained from investments the business has made such as stocks, bonds, land, buildings, or equipment. (This is cash flow from investing) 3. Finally, a business may obtain cash through financing. (Financing may be in the form of cash donated to the business in return for ownership or in the form of money borrowed from other entities)
THE THREE GENERAL EVENTS THAT CAUSE BUSINESS RISK
1. Events related to the property of the business 2. Events related to personnel 3. Events related to customers and others.
VALUE
A customer's subjective assessment of benefits relative to costs in determining the worth of a product
ARBITRATION
A dispute resolution process held instead of court cases in which both sides present their case to a legal professional. - Involves the two sides presenting their case to a private judge. - Agreement for this should be written, often included in contracts. - You may not sue if you agree to this - the decision is binding.
GROWTH TRAP
A financial crisis that is caused by a business growing faster than it can be financed. - Because of increased sales, you need more labor, more materials for your product, more factory space, and more warehouse space to store completed products until they can be shipped to your customers
MARKUP PRICING
A price-setting method where an amount is added to the cost of a product to set the retail price and provide a profit.
ODD-EVEN
A recent study showed that when an identical dress was priced at $34, $39, and $44, a third more dresses were sold at $39 than at either of the other two prices.
INTERNAL CONTROLS
A set of rules and procedures that work to limit the opportunity for employee theft or malfeasance. - The primary method of ensuring honesty in employees. - To separate the duties of maintaining the security of assets from the duties of maintaining records of those assets.
PERPETUAL INVENTORY
A system of recording the receipt and sale of each item as it occurs. - Maintains a constant record of the amounts and value of inventory that has been sold and the amounts and value of inventory on hand. - Provide you with instant access to accurate inventory records, thus greatly easing the problems of managing inventory levels. - The main drawback to using this is the high cost in time needed for constant record keeping
AN E-TAILER
An electronic retailer; a store that exists only on the Internet.
FIDELITY BONDS
Bonds, also called dishonesty bonds, that repay employers for losses caused by dishonest or negligent employees.
INTERMEDIARIES
Frequently small businesses themselves—provide the service of getting the product to the end consumer, including such functions as inventory control, advertising and promotion, delivery and warranty services, to name a few. - For these services, they take a percentage of the profit. As a result, the final price the end user must pay is often four (or more) times the manufacturing cost.
GUERILLA MARKETING
Is a term used to describe extremely low-cost or free alternative marketing. It covers things such as doorknob hangers or flyers stuck under windshield wipers.
B-CORP CERTIFICATION
Is a way to publicly inform potential investors that a for-profit firm is pursuing a social benefit role. - While this doesn't negate the legal responsibility for making and distributing a profit, it does provide a way to publicly strike a different balance between profit and benefit in a way that is transparent enough that investors could not complain to the state about having their profits diverted to a social benefit.
JOINT VENTURES
Is simply a formalized partnership between two or more businesses for some specific purpose. - Are quite common among medium to large businesses and are growing among small businesses. - Two or more businesses combine to undertake a specific economic activity.
SOLE PROPRIETORSHIPS
It is an unincorporated business owned and run by one individual with no distinction between the business and you, the owner.
PRO FORMA FINANCIAL STATEMENTS
Latin for "in the form of" when used to describe financial statements, indicates estimated or hypothetical information. - Method of organizing and formatting business planning
EXPORTING PAYMENT PROCEDURES
Letter of credit: A document issued by a bank that guarantees a buyer's payment for a specified period of time upon compliance with specified terms or Documentary draft: A draft that can be exercised only when presented with specified shipping documents.
COMMERCIAL PAPER
Notes issued by credit worthy corporations - Form of short-term financing by issuing a note for cash to another company - issued to be paid to the bearer of the note and fully transferable.
THE LAW OF SUPPLY AND DEMAND IN PRICING
The economic theory that describes how the demand for products (or services) and the supply of them affect each other - EX: If the supply suddenly shrinks (e.g., imports of basic T-shirts you sell in your business dry up because of a trade embargo, a typhoon, or any other reason), the prices go up. - EX: If demand suddenly grows (everyone wants to wear a red T-shirt on Monday to show support for the hometown team), the prices are likely to go up.
PRICE ESCALATION
The pricing disparity in which goods are priced higher in a foreign market than in the home market; caused by the added costs involved in exporting products from one country to another
The difference between actual and budget is called a
Variance
REASONS WHY ACCOUNTING IS IMPORTANT FOR A SMALL BUSINESS
- It proves what your business did financially. - It shows how much your business is worth. - Banks, creditors, development agencies, and investors require it. - It provides easy-to-understand plans for business operations. - You can't know how your business is doing without it.
MASK
- Motivation - Attributes - Skills - Knowledge
NON-TRADITIONAL METHOD OF FINDING EMPLOYEES
- Networking - Outsourcing via virtual employee - Internet Recruiting - Employee Leasing EXAMPLES: - Contact local churches and the pastors to see if they have parishioners who are looking for a new job. - Visit local high schools for entry-level jobs, and local community colleges for those interested in management or a technical career. - State unemployment offices are a great resource, with no cost to the employer.
THE SIX FACTORS MOST VALUABLE TO EMPLOYEES
- Teamwork. - Recognition. - Training. - Empowerment. - Contribution. - Communication.
The right amount of inventory to keep on hand and the right amount to order at one time is determined by:
- The cost of processing an order. - The cost of keeping merchandise in inventory. - The cost of lost sales if you run out. - The time it takes to receive inventory after it is ordered.
The economic order quantity (EOQ) helps you think in terms of ordering costs and carrying costs - total cost is the sum of:
- The cost to buy the inventory. - The cost to store, protect, and maintain inventory. - The cost of making an order to purchase inventory.
CONSIDERATIONS FOR ADDING FULL-TIME EMPLOYEES
- You need to know your basic needs and what roles the new employee will fit into. - Ultimately, you want to "match" the job with the ideal individual. - Your first step is to define and describe all the work that will be part of the new job. - Then you will need to know how to evaluate potential employees to see how well they match your ideal set of requirements.
THE THREE MAJOR SOURCES FOR FINANCING
1. Debt: Money borrowed for the purposes of investment in a business. 2. Equity: Money contributed to the businesses in return for part ownership of the business. 3. Gifts: Capital resources that neither provide any ownership nor require any repayment to the giver.
KEY FACTORS IMPACTING A PRICING DECISION
1. Demand for the product or service: Where demand is high, you can charge a premium. Where it is low, you need to consider lowering prices to keep cash flowing into the business. 2. Value delivered to the customer: You can buy hair-coloring kits at the supermarket for $8, and a single use of professional products would not cost more, but having a professional do the job with professional products and expertise can easily cost 10 times as much—and many people gladly pay it. 3. Prices set by competing firms: If a liter of Coke costs a dollar, few are likely to pay $2 for a liter of Pepsi. 4. Your business strategy and product placement: A company that prides itself on an environmentally conscious approach to manufacturing probably would not choose to use cheaper, unrecycled components, even if it helped profits.
PATENT
A grant by the U.S. government to an inventor for an idea that is new, useful, and nonobvious, giving the inventor the exclusive right to make, use, or sell his or her idea.
ECONOMIC ORDER QUANTITY (EOQ)
A statistical technique that determines the quantity of inventory that a business must hold to minimize total inventory cost.
PRICE SKIMMING
A store will set relatively high prices on the newest luxury products when they are first released, and then lower the price over time.
SEPARATION OF DUTIES
A type of internal control that separates the physical control of an asset from the person accounting for that asset. - A core technique to safeguard money and other valuable assets.
HOLD HARMLESS AGREEMENT
A type of waiver in which a party agrees not to hold another party responsible for certain events - One party is giving up legal rights to sue or otherwise enforce his or her rights.
PULL THROUGH INVENTORY SYSTEM
Acquiring inventory in response to a completed sale - A term for just-in-time inventory systems in which product is ordered and placed into production only after a sale has been completed.
EXTERNAL REFERENCE PRICE
An estimation of what a price should be based on information external to a consumer, such as advice, advertisements, or comparison shopping. - Looking at competitive ads, researching on the Internet, visiting several stores, or asking friends.
FREIGHT FORWARDERS
Firms specializing in arranging international shipments— packaging, transportation, and paperwork. - Are specialists in export-related activities including tariff schedules, shipping, insurance, packing, transportation arrangements, customs clearing, and other export details.
WORKER ADJUSTMENT AND RETRAINING NOTIFICATION (WARN) ACT
Protects workers, their families and communities by requiring most employers with 100 or more employees to provide notification 60 calendar days in advance of plant closings and mass layoffs.
ACCOUNTS PAYABLE
Records to track what you owe and to make timely payments in order to capture prompt pay discounts and to maintain a good credit rating for your business.
PSYCHOLOGICAL CONTRACT
Refers to employees' beliefs about the promises between the employee and the firm. These beliefs are based on the perception that promises have been made (e.g., competitive wages, promotional opportunities, job training) in exchange for certain employee obligations such as giving of their energy, time, and technical skills - Owners often communicate conflicting terms when making these
MICRO INVENTORIES
The purchase of inventory only after a sale is made; very typical with Internet firms. - Is a set of goods or services that consists of only one or a few items. - Are the small business's answer to just-in-time inventory methods in big business
BOUNDED RATIONALITY MODEL OF MANAGEMENT
Theories based on the assumption of limited human abilities Thus to make good decisions we need: 1. Good information 2. Efficient ways to condense information so it is understandable 3. Methods to help compare alternatives.
COPYRIGHT
Exclusive right given to the creator of a literary or artistic work to make use of that work. - Involves the expression of ideas, not the ideas themselves. - For new works last for the creator's life plus 70 years. - If a "work for hire," this lasts for 120 years or 95 years from publication, whichever is less. - The government does not create these, but they can be registered with the federal government.
INTERNAL AUDIT PREVENTS... (DOES)
- An objective evaluation of your risk control structure. - A systematic analysis of your business processes and controls. - Information on irregularities detected during the audit process. - A review of your firm's compliance with relevant regulations. - A review of the existence and value of the assets of your business. - A review of operational and financial performance. - Recommendations for more effective and efficient use of resources. - Assessments of how well your business is accomplishing your goals and objectives. - Information about your employees' adherence to the organization's values and code of ethics.
FOUR FACTORS USED TO DETERMINE THE OPTIMUM PRICE
1. Demand for the product or service: Where demand is high, you can charge a premium. Where it is low, you need to consider lowering prices to keep cash flowing into the business. 2. Value delivered to the customer: You can buy hair-coloring kits at the supermarket for $8, and a single use of professional products would not cost more, but having a professional do the job with professional products and expertise can easily cost 10 times as much—and many people gladly pay it. 3. Prices set by competing firms: If a liter of Coke costs a dollar, few are likely to pay $2 for a liter of Pepsi. 4. Your business strategy and product placement: A company that prides itself on an environmentally conscious approach to manufacturing probably would not choose to use cheaper, unrecycled components, even if it helped profits.
THE THREE PRIMARY CAUSES OF CASH FLOW PROBLEMS
1. Difficulty collecting money due from customers 2. Seasonal variation in sales 3. Unexpected decreases in sales
THE MAIN THREE TYPES OF ACCOUNTING
1. Managerial accounting: attempts to predict the results of management decisions. 2. Tax accounting: is used to produce tax returns and schedules. 3. Financial accounting: is a formal, rule-based system intended primarily for absentee owners, bankers, investors, and regulators.
THE TWO PARTS TO A FORMAL PERFORMANCE APPRAISAL
1. The performance review 2. The pay review. - These reviews should be held at different times of the year.
3 MAIN PURPOSES OF MONEY
1. To facilitate exchanges of unlike assets, such as your labor for a grocer's food. 2. To measure the value of things, both tangible, such as jewelry, and intangible, such as pain and suffering. 3. To keep track of wealth.
Three primary reasons to use outside equity in your business:
1. You will reduce your own exposure to financial loss 2. Your business will not have increased costs in the form of interest 3. Bringing outside investors into an existing business can often reenergize it by providing new ideas, procedures, and processes.
LITIGATION
A formal dispute resolution method that operates using the court system, typically with a lawyer representing each party. - Uses small-claims court or the regular court to settle differences. - The only guaranteed winners are the attorneys. - Good attorneys keep their clients out of court. - Large companies weather expensive form of this is better than small firms. - Beware any attorney guaranteeing a certain outcome.
ACCOUNTING ANALYSIS
A method for analyzing cost behavior in which an account is classified as either variable or fixed based on the analyst's prior knowledge of how the cost in the account behaves
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. - Primary source of information about a business's profitability.
CASH EQUIVALENTS
Assets that may be quickly converted to cash. - Are assets that may be turned into cash in a slightly longer time, from a few hours to a few days, such as marketable securities, commercial paper, and debt investments that mature in less than three months. - Businesses use this because they provide a better measure of the resources available to pay current bills than is provided by cash alone.
CROWDFUNDING
Funding a business online through the collective involvement of others who provide donations, loans, or investments.
MEDIATION
In which the dispute is put to a neutral third party who is not a judge. - Works only if the two sides agree to the decision and settlement. - Are generally much faster to complete than either arbitration or litigation, and it is the least expensive of the three approaches
PARTITIONED PRICING
Setting the price for a base item and then charging extra for each additional component. EX: You set the price for the main component—a computer for $999—but just about everything else you need is extra. You need a printer? That's another $100. How about cables to connect the printer to the computer? That's $29.95. Did you realize you could increase your computer's memory, add a read/write CD burner, or a DVD player? They cost more, of course. Extended warranty? $79.95. Don't you want to scan photos, add a digital camera, and upgrade to a flat-screen monitor? What about some ink cartridges for that new printer? And several different kinds of paper? Don't forget to check out our excellent selec- tion of software on your way up to the checkout. That $999 computer may end up costing twice that much (or more) before the consumer gets out the door.
ERRORS AND EMISSIONS INSURANCE
__________ and malpractice insurance are examples of special types of liability insurance that cover losses from harm caused during the performance of your profession. - Covers claims made by clients of attorneys, accountants, and other consultants.
