Chapter 1 Terms and Concepts

Causes of Unemployment

1. Wage rates get too high, businesses will respond by hiring fewer workers--> increase in unemployment 2. Businesses could raise prices to counter increased labor costs, but won't be able to sell as many of their products at higher prices. B/c of reduced sales, they will cut back on hiring and, once again, unemployment will go up

Freedom of choice

you can sell your labor to any employer you choose. You can also choose which products to buy, and producers can usually choose whom to hire and what to produce.

Opportunity and Enterprise

Success in business requires spotting a promising opportunity and then developing a good plan for capitalizing on it.

SEC

The U.S. Securities and Exchange Commission is an independent agency of the United States federal government. - legally enforce accounting and auditing rules and procedures

Consumer choice and demand

The freedom of consumers to choose how to satisfy their wants and needs. The freedom of business owners to decide how to meet those wants and needs.

Market

mechanism for exchange between buyers and sellers of a particular good or services.

Inflation

occurs when widespread prices increases occur throughout an economic system. - when amount of $$$ in the economy exceeds the increase in actual output. - ppl. have more $$$ to spend, but the same quantity of products available to buy. - when ppl. compete for the same available products, prices go up.-- those high prices will eventually bring the amount of $$$ in the economy back down - often the additional $$$ are not distributed proportionally to all ppl. and price increases often continue beyond what is necessary. --> purchasing power for ppl. declines. - we can measure inflation by measuring price increases. - better than deflation - indicates the overall economy is growing (in an erratic manner).

Accounting Information System (AIS)

organized procedure for identifying, measuring, recording, and retaining financial information for use in accounting statements and management. - includes all of the people, reports, computers, procedures, and management, and resources that are needed to compile financial transactions.

Private property rights

ownership of the resources used to create wealth is in the hands of the individuals.

Controller

person who manages all of a firm's accounting activities (chief accounting officer)

Labor (Human Resources) aka human capital

physical and mental capabilities of people as they contribute to economic production.

Socialism

planned economic system in which the government owns and operates only selected major sources of production.

Fiscal Policies

policies used by a government regarding how it collects and spends revenue. - congress- taxe rates

Monetary Policies

policies used by a government to control the size of its money supply - federal reserve - influence the willingness to lend money

Law of Demand

principle that buyers will purchase (demand) more of a product as its price drops and less as its price increases.

Law of Supply

principle the producers t

Management Accountant

private accountant who provides financial services to support managers in various business activities within a firm. - help with: marketing, production, engineering, and so forth.

Privatization

process of converting government enterprises into privately owned companies.

Certified Management Account (CMA)

professional designation awarded by the Institute of Management Accountants (IMA) in recognition of management accounting qualifications.

CPA Services

provide auditing, tax, and management services - small firms earn most of their income from tax - may sometimes include engineers, architects, mathematicians, and psychologists, all of whom are available for consulting.

Accounting

a comprehensive system for collecting, analyzing, and communicating financial information. - communicated to the owner's, employees, and regulatory agencies.

Deflation

a decrease in the general level of prices - indicates the overall economy is shrinking

Productivity

a measure of economic growth that compares how much a system produces with resources needed to produce it. - a major factor in the growth of an economic system. - compares different factors of production and the efficient use of them. - if more products are being produced with fewer factors of production, the prices of these products will likely go down.--> meaning a consumer would need less currency to purchase the same quantity of these products.--> standard of living- in regards to purchased products- has improved. -** if an entire economic system increases its productivity, the overall standard of living increases/ improves. -*** standard of living ONLY improves through increases in productivity -- real growth in GDP reflects growth in productivity.

Price Consumer Index (CPI)

a measure of the prices of typical products purchased by consumers living in urban areas. CPI= % of prices compared to a base period.

Creditor Nation

a nation that exports more than it imports, so that it is owed money by other nations.

Debtor Nation

a nation that imports more than it exports and so owes money to other nations.

Recession

a period during which aggregate output, as measured by GDP, declines. - producers need less employees- less labor- to produce--> unemployment rises

Depression

a prolonged and deep recession

Certified Public Accountant (CPA)

accountant licensed by the state and offering services to the public. - certified by taking exam of American Institute of Certified Public Accountants (AICPA)---> CPA Exam -- Some states require practice in private company or government entity under a CPA

General Accepted Accounting Principles (GAAP)

accounting guidelines that govern the content and form of financial reports. - formulated by the Financial Accounting Standards Board (FASB) of the AICPA and govern the content and form of financial reports - CPA will verify that cients AIs and reports comply with GAAP

Technological Environment

all the ways by which firms create value for their constituents (customers) -- human knowledge, work methods, physical equipment, electronics and telecommunications, and various processing systems--> all used to perform business activities.

Bookkeeping

recording of accounting transactions. - helps determine how well a business is being managed and assess its overall financial strength.

Economic Environment

relevant conditions that exist in the economic system in which a company operates. refers to macro-economic factors, including national income, economic growth, and inflation, that affect patterns of consumer and business spending

Factors of Production

resources used in the production of goods and services- labor, capital, entrepreneurs, physical resources, and information resources. --> capital- - (finance def.) money - (economic def.) real capital or produced capital (finished product)

Information Resources

data and other information used by a business. The information about external business environmental conditions that a firm uses to its competitive advantage. ex: market forecasts, specialized knowledge, and economic data. market forecasts- projects future numbers, characteristics, and trends in your target market.

Profits

difference between a business's revenues and its expenses.

Types of Economic Systems

different types of economic systems that view the factors of production differently. Planned and market economies. Most systems fall between aforementioned extremes. traditional, command, market, mixed

Private Accountants

salaried accountant hired by a business to carry out its day-to-day financial activities. - May also be CPAs, but do not engage in external audit processes. - responsibilities: budgeting, financial planning, internal auditing, payroll, and taxation - in small businesses, 1 single person may handle all accounting tasks. - may be non-CPA or CPA

Business Cycle

short-term pattern of economic expansions and contractions.

Economic Indicators

statistics that help assess the performance of an economy.

Capitalism

system that sanctions the private ownership of the factors of production and encourages entrepreneurship by offering profits as an incentive. political basis of market processes.

Audit

systematic examination of a company's accounting system (AIS) to determine whether its financial reports reliably represent its operations. - organizations must provide audit reports - must hire independent accountants to ensure integrity in audit reports.

Physical Resources

tangible items that organizations use in the conduct of their businesses. -- natural resources, raw materials, offices, storage and production facilities, parts and supplies, computers and peripherals, and a variety of other equipment.

Mixed Market Economy

economic system featuring characteristics of both planned and market economies. - in reality, there are no "pure" planned or "pure" market economies. - may be as free as possible, but still restricts certain activities. - when country is attempting to transition from planned to market economy, it usually begins by adopting market mechanisms through privatization.

Private Enterprise

economic system that allows individuals to pursue their own interests without undue governmental restrictions. - private enterprise requires the presence of four elements: private property rights, freedom of choice, profits, and competition.

National Debt

the amount of money the government owes its creditors. - www.brillig.com/debt_clock to find out national debt

Core Competencies for Accounting

the combination of skills, technology, and knowledge that will be necessary for the future CPA. - IDed by the CPA Vision Project - skills go far beyond the ability to "cruntch" numbers, wnat communication, critical thinking, leadership etc.

B corporation (benefit corporation)

the company is legally required to adhere to socially beneficial practices.

Sociocultural Environment

the customs, mores, values, and demographic characteristics of the society in which and organization functions. Determines the goods and services, as well as the standard of business conduct, that a society is likely to value and accept.

Balance of Trade

the economic value of all the products that a country exports minus the economic value of all the products it imports. **CAN inhibits the growth of an economic system - Balance of Trade= exports-imports - a positive balance of trade results when a country exports (sells to other countries) more than it imports (buys from other countries). --> +BoT= exports>imports --> aka Trade Surplus - a Negative Balance of Trade results when a country imports (buys from other countries) more than it exports (sells to other countries). --> -BoT= exports<imports --> aka Trade deficit -- trade deficit affects economic growth b/c the amount of money spent on foreign products has not been paid in full--> meaning it is borrowed money, and borrowed money costs more in the form of interest. -- $ that flows out of the country to pay off the deficit can't be used to invest in productive enterprises. US is a debtor nation rather than a creditor nation :(

Domestic Business Environment

the environment in which a firm conducts its operations and derives its revenues.

Global Business Environment

the international forces that affect a business--international trade agreements, international economic conditions, political unrest. Any given business is likely to be affected by international market opportunities, suppliers, cultures, competitors, and currency values.

Unemployment

the level of joblessness among people actively seeking work in an economic system. - low unemployment= shortage of labor available for businesses to hire - increase in the wage offered, but means and increase in factor of production--> increase the price of product b/c into profit margins. - purchasing power declines.

Forensic Accounting (FA)

the practice of accounting for legal purposes. - An area of accounting that uses accounting, auditing, and investigative skills to conduct investigations into theft and fraud. - one of the fastest growing areas in accounting - aka "private eyes of the corporate culture" - must be good detectives - do not accept corporate reports - assist in the investigation of business and financial issues that may have application to a court of law. - called upon by law enforcement agencies, insurance companies, law firms, private individuals, and business firms both for investigative accounting and litigation support in crimes against companies, crimes by companies, and civil disargreements. - Al Vondra watch for deviations from GAAP as indicators of possible fraudulent practices.

Purchasing Power Parity

the principle that exchange rates are set so that the prices of similar products in different countries of similar products in different countries are about the same. - gives us a much better idea of what people can actually buy with the financial resources allocated to them by their respective economic systems. - gives us a better sense of the standard of living across the globe

Political-Legal Environment

the relationship between business and government, usually in the form of government regulation of business. Component of the marketing environment consisting of laws and their interpretations that require firms to operate under competitive conditions and to protect consumer rights.

Economic System

the structure of methods and principles that a society uses to produce and distribute goods and services. A nation's system for allocating its resources among its citizens, both individuals and organizations.

Standard of Living

the total quantity and quality of goods and services people can purchase with the currency used in their economic system.

Aggregate Output

the total quantity of goods and services produced by an economic system during a given period. - Measures GDP When output grows more quickly than the population, 1. output per capita- the quantity of goods and services per person- goes up. 2. the system provides more of the goods and services that people want. --> these two things lead to a higher standard of living

demand

the willingness and ability of buyers to purchase a good or service.

supply

the willingness and ability of producers to offer a good or service.

Gross National Product (GNP)

total value of all goods and services produced by a national economy within a given period regardless of where the factors of production are located. - may include outputs not produced in the US - only in reference to the nationality of company producing - will not contribute to GDP of country that the foreign country has setteled in. - labor from foreign country will not be included, but profits will.

Gross Domestic Product (GDP)

total value of all goods and services produced within a given period by a national economy through domestic factors of production. - a measure of aggregate output. - GDP goes up--> aggregate output goes up--> nation experiencing economic growth - must ONLY include output produced in the country

cyclical unemployment

unemployment caused by a business cycle recession

Managers

use AIS to develop goals and plans, set budgets, and make decisions about market opportunities

Investors and Creditors

use AIS to estimate returns to stockholders, determine growth prospects, and decide whether a firm is a good credit risk.

Government Regulatory Agencies

use AIS to fulfill their duties toward the public. The Securities and Exchange Commission (SEC), for example, requires firms to file financial disclosures so that potential investors have valid information about their financial status.

Employees and Unions

use AIS to plan for and receive compensation and such benefits as health care, vacation time, and retirement pay.

Tax Authorities

uses AIS to plan for tax inflows, determine the tax liabilities of individuals and businesses, and ensure that correct amounts are paid on time.

How does the national debt affect economic growth?

- Government raises $ through taxes, but also through selling bonds (IOU with interest) - US gov't will not default on bonds, that is fail to make payments when due. - Gov't must also offer a decent return on the buyer's investment, and gov'ts do this by paying interest @ a competitive rate. - by selling bonds gov'ts (US), competes w/ every other potential borrower from the available supply of available money - the more $$$ the gov't borrows, the less money is available for the private borrowing and investment that increases productivity (remember $ is a factor of production).

Real Growth Rate (RGR)

- RGR of GDP adjusts for inflation and change in the value of the country's currency. GDP and GNP usually differ by less than 1% - economists argue GDP is a more accurate indicator of domestic economic performance. -- reflects growth in productivity--> reflects standard of living

Noncertified Public Accountants

- accountants that did not take the CPA exam - those working towards CPA exam or going through state verification - are releid upon by small or big businesses and individuals for income-tax preparation, payroll accounting, and financial planning services so long as they abide by local and state laws - put together financial statements that are used for internal purposes, based on information gathered buy management.-- these statements may include a notification that auditing methods were not used in their preparation.

Investigative Accounting

- forensic accountant--> be familiar with legal concepts and procedures of the case, would ID and analyze pertinetn financial evidence- documents, bank accounts, phone calls, computer records, and people- and present accounting conclusions and their legal implications - develop reports, exhibits, and docs to communicate findings.

Big 4 Public Accounting Firms

1. Deloitte Touche Tohmatsu- majority of revenue comes from auditing and managerial consulting is growing 2. Ernst & Young (United Kingdom)- majority of revenue comes from auditing and managerial consulting is growing 3. PricewaterhouseCoopers, PwC (United Kingdom) 4. KPMG (Netherlands) have more than 150,000 employees worldwide.

How to determine if an economy is going through a recession.

1. Measure aggregate output= function of real GDP 2.

Bond

A financial security that represents a promise to repay a fixed amount of funds by a specific date. - IOU with interest - are attractive investments b/c they are extremeley safe

severance pay

A set amount of money to compensate employees for being discharge and to help them through the time that they remain unemployed.

External Environment

Everything outside an organization's boundaries that might affect it.

Real GDP

GDP adjusted to account for changes in currency values and price changes. - reflects growth in productivity-- reflects standard of living - Real GDP in year t= nominal GDP in year t/price index - Real GDP= Units of Output x Price Per Unit From Base Year

Nominal GDP

GDP measured in current dollars or with all components valued at current prices. - Not an adjusted GDP - Nominal GDP= units of ouput x price per units

What is government tries to correct this situation by injecting money into the economic system- say by cutting taxes or spending more money?

Prices may go up b/c of increases consumer demand.

Equation for Profit

Profit = Total Revenue - Total Cost

Brick-and-Mortar Business

Traditional businesses with actual stores in which trade or retail occurs, it does not exist solely on the internet.

Market Economy

an economy in which individuals control production and allocation decisions through supply and demand. - Rely on capitalism and free enterprise to create an environment in which producers and consumers are free to sell and buy what they choose (within certain limits). - items produced and price paid are determined by supply and demand. - goal= to create shared value- effective businesses benefit b/c they earn profits on whatb they sell and customers also benefit by getting what they want for the best price available. - b/ buyers and sellers enjor freedom of choice; that is the vendors are free to charge whatever price they choose for product, and the customer is free to decide whether to buy that vendors product, someone else's product, or not buy any product at all. - individuals are free to buy what they want, work where they want, invest, save, or spend their money in whatever manner they choose. - businesses are free to decide what product to make, where to sell them, and at what prices to charge. - the political basis of market processes is called capitalism; the operation of demand and supply

Entrepreneur

an individual who accepts the risks and opportunities involved in creating and operating a new business venture. Most economic systems encourage entreprenuers, both to start new businesses and to make the decisions that allow the to create new jobs and make more profits for their owners (shareholders are included to an extent as owner).

Business

an organization that provides goods or services to earn profits.

Management Advisory Services

assistance provided by CPA firms in areas such as financial planning, information systems design, and other areas of concern for client firms. - personal financial planning to planning corporate mergers. - production scheduling, information systems studies, AIS design, and even executive recruitment

Tax Services

assistance provided by CPA's for tax preparation and tax planning. - CPA's advice can help a business structure (or restructure) operations and investments and perhaps save millions of dollars in taxes. - gov't may fluctuate taxation, therefore, need for CPA services.

Stability

condition in which the amount of money available in an economic system and the quantity of goods and services produced in it are growing at about the same rate.

Planned Economy

economy that relies on a centralized government to control all or most factors of production and to make all or most production and allocation decisions. Two forms: 1. Communism- political system in which the government owns and operates all factors of production --> - gov't would assign ppl to jobs; it also would own all business and control business decisions- what to make, how much to charge, and so forth. --> - Marx proposed that indiv. would contribute according to their abilities and receive benefits according to their needs. --> - Marx expected gov't ownership of production factors to be temporary; once society had matured, government would wither away, and workers would take direct ownership of the factors of production. 2. Socialism (also dicussed as a form of mixed market economy)

Financial Accounting

field of accounting concerned with external users of a company's financial information -- consumer groups, unions, stockholders, suppliers, creditors, and government agencies -- prepares reports such as income statements and balance sheets that focus on the activities of the company as a whole rather than on individual departments or divisions.

Managerial (Management) Accounting

field of accounting that serves internal users of a company's financial information. - info used to make departmental decisions, monitor projects, and plan future activities. support salespeople, negotiator

Capital

funds needed to create and operate a business enterprise.

Intangable Goods

goods that do not have a physical nature. i.e. downloadable music etc.

tangable goods

goods that have a physical nature.

Stabilization Policy

government economic policy intended to smooth out fluctuations in output and unemployment and to stabilize prices. - made up by fiscal and monetary policy

GDP per Capita

gross domestic product divided by total production. --> GDP per Capita= GDP/total population - ** a reflection of the standard of living. - GDP per individual person - usually calculated on an annual basis. - a better measure than GDP for the economic well-being of the average person.

Competition

if profits motivate individuals to start businesses, competition motivates them to operate those businesses efficiently. Competition occurs when two or more businesses vie for the same resources or customers.

Natural Monopoly

industry in which one company can most efficiently supply all needed goods or services.