GEB1011 MODULE 6

Federal Reserve District Banks

(PIC ON DESKTOP)

Steps in the Accounting Cycle

1. Analyze source documents (sales slips, travel records, etc.) 2. Record transactions in journals 3. Transfer (post) journal entries to ledger 4. Take a trial balance 5. Prepare financial statements • Balance sheet • Income statement • Statement of cash flows 6. Analyze financial statements

list the steps in investing in socks and bonds from beginning to end

1. decide what stock or bond you want to buy 2. find a brokerage firm/stockbroker 3. stockbrokers place and order and negotiate a price 4. trade is reported to your broker, who notifies you

Check-Clearing Process through the Federal Reserve Bank System

1.The buyer (a farmer in Quince Orchard, Maryland) sends his check to the seller (a tractor dealer in Austin, Texas). 2.The dealer deposits the check in his account at a local bank in Austin. 3.The Austin bank deposits the check for credit in its account at the Federal Reserve Bank of Dallas. 4.The Federal Reserve Bank of Dallas sends the check to the Federal Reserve Bank of Richmond for collection. 5.The Federal Reserve Bank of Richmond forwards the check to the local bank in Quince Orchard, where the farmer has his account. 6.The local bank in Quince Orchard deducts the check amount from the farmer's account. 7.The Quince Orchard bank authorizes the Federal Reserve Bank of Richmond to deduct the check amount from its deposit account with the Federal Reserve Bank. 8.The Federal Reserve Bank of Richmond pays the Federal Reserve Bank of Dallas. 9.The Federal Reserve Bank of Dallas credits the Austin bank's deposit account. 10.The Austin bank credits the tractor dealer's account.

The Accounting Cycle

Accounting Cycle — A six-step procedure that results in the preparation and analysis of the major financial statements. Bookkeeper's Role • Bookkeeping — The recording of business transactions. • Bookkeepers divide a firm's transactions into meaningful categories and post them into a record book or computer program called a journal. • Double-entry bookkeeping — The practice of writing every business transaction in two places; done so they can check one list of transactions against the other for accuracy. Bookkeeper's Tools • Ledger — A specialized accounting book or computer program in which information from accounting journals is accumulated into specific categories and posted so that managers can find all the information about one account in the same place. • Trial balance — A summary of all the financial data in the account ledgers that ensures the figures are correct and balanced. Using Technology in Accounting • Computerized accounting programs post information instantly and from remote locations. • Accounting software, such as Intuit's QuickBooks, address the specific needs of small businesses.

Using Leverage (Debt) versus Equity Financing

Additional Debt: Stockholder's equity $500,000 Additional equity $0 Total equity $500,000 Bond @8% interest 200,000 Total Shareholder equity $500,000 Year-end earnings: Gross profit $100,000 Less bond interest -16,000 operating profit $84,000 Return on equity 16.8% $84,000 divided by $500,000 = 16.6% Additional equity: Stockholder's equity $500,000 Additional equity $200,000 Total equity $700,000 Bond interest $0 Total Shareholder equity $700,000 Year-end earnings: Gross profit $100,000 less interest 0 Operating profit $100,000 Return on equity 14.3% $100,000 divided by $700,000 = 14.3%

Control of the Money Supply

Basics about the Federal Reserve •Five major parts: 1.Board of governors 2.Federal Open Market Committee (FOMC) 3.Twelve Federal Reserve banks 4.Three advisory councils 5.Member banks of the system The Reserve Requirement •Reserve requirement — Percentage of commercial banks' checking and savings accounts that must be physically kept in the bank. Open-Market Operations •Open-market operations — Buying and selling of U.S. government bonds by the Fed with the goal of regulating the money supply. The Discount Rate Discount rate — Interest rate that the Fed charges for loans to member banks. The Federal Reserve's Check-Clearing Role •The function comes into play when you write a check to an out-of-state retailer, for example. •Banks have taken measures to lessen the use of checks.

Stock investors are often called bulls or bears according to their perceptions of the market.

Bulls believe that stock prices are going to rise; they buy stock in anticipation of the increase. A bull market is when overall stock prices are rising (when the market is doing well). Bears expect stock prices to decline and sell their stocks in anticipation of falling prices. That's why, when stock prices are declining, the market is called a bear market.

Differences between Debt and Equity Financing

Characteristics of Debt Financing: •Management Influence: There's usually none unless special conditions have been agreed on. •Repayment: Debt has a maturity date and the principal must be repaid. •Yearly obligations: Payment of interest is a contractual obligation. •Tax benefits: Interest is tax-deductible. Characteristics of Equity Financing: •Management Influence: Common stockholders have voting rights. •Repayment: Stock has no maturity date and the company is never required to repay equity. •Yearly obligations: The firm isn't legally liable to pay dividends. Tax benefits: Dividends are paid from after-tax income and aren't deductible.

The U.S. Banking System

Commercial Banks •Commercial bank — A profit-seeking organization that receives deposits from individuals and corporations in the form of checking and savings accounts and then uses some of those funds to make loans. •A commercial bank has two types of customers: 1.Depositors Borrowers Services Provided by Commercial Banks •Demand deposit — The technical name for a checking account; the money in a demand deposit can be withdrawn anytime on demand from the depositor. •Time deposit — The technical name for a savings account; the bank can require prior notice before the owner withdraws money from a time deposit. •Certificate of deposit (CD) — A time-depot (savings) account that earns interest to be delivered on the certificate's maturity date. Services to Borrowers •Loans are given on the basis of the recipient's creditworthiness. Savings and Loan Associations (S&Ls) •Savings and loan association — A financial institution that accepts both savings and checking deposits and provides home mortgage loans. •Often known as thrift institutions because their original purpose was to promote customer thrift and home ownership. Credit Unions •Credit unions — Nonprofit, member-owned financial cooperatives that offer the full variety of banking services to their members. •As nonprofits, credit unions enjoy an exemption from federal income taxes. Other Financial Institutions (Nonbanks) •Nonbanks — Financial organizations that accept no deposits but offer many of the services provided by regular banks (pension funds, insurance companies, commercial finance companies, consumer finance companies, and brokerage houses). •Nonbanks include: -Life insurance companies -Pension funds — Amounts of money put aside by corporations, nonprofit organizations, or unions to cover part of the financial needs of members when they retire. -Brokerage firms -Commercial finance companies -Corporate financial services

Understanding Stock Market Indicators

Dow Jones Industrial Average (the Dow) (DJIA) — The average cost of 30 selected industrial stocks, used to give an indication of the direction (up or down) of the stock market over time. Critics say the 30-company Dow is too small a sample and suggest following the S&P 500. S&P 500 tracks the performance of 400 industrial, 40 financial, 40 public utility, and 20 transportation stocks. Riding the Market's Roller Coaster •October 29, 1929 — Black Tuesday; the market lost 13 percent of its value. •October 19, 1987 — The market suffered its worst one-day drop when it lost 22 percent of its value. •October 27, 1997 — Fears of an economic crisis in Asia cause widespread panic and losses. •The market collapsed into a deep decline in 2000 through 2002 when the tech stock bubble burst. -Investors lost 7 trillion dollars in market value. •Starting in 2008, the financial crisis fueled a massive exodus from the stock market, resulting in record losses. •Program trading — Giving instructions to computers to automatically sell if the price of a stock dips to a certain point to avoid potential losses. -Analysts believe program trading caused the turmoil in 1987. -The exchanges created mechanisms called curbs and circuit breakers to restrict program trading.

The Role of Finance and Financial Managers

Finance — The function in a business that acquires funds for the firm and manages those funds within the firm. Finance activities include: •Preparing budgets •Doing cash flow analysis •Planning for expenditures Financial management — The job of managing a firm's resources to meet its goals and objectives. Financial managers — Examine financial data prepared by accountants and recommend strategies for improving the financial performance of the firm. Financial managers are responsible for: •Obtain funds •Effectively control use of funds The Value of Understanding Finance •Most common reasons a firm fails financially: 1.Undercapitalization 2.Poor control over cash flow 3.Inadequate expense control What Is Financial Management? •Finance functions are particularly critical to small and medium-sized businesses. •It's essential that financial managers stay abreast of changes or opportunities in finance, such as changes in tax law.

Accounting Disciplines

Financial Accounting • Financial accounting — Accounting information and analyses prepared for people outside the organization. • Outside users are interested in these questions: - Is the organization profitable? - Is it able to pay its bills? - How much debt does it owe? • Annual report — A yearly statement of the financial condition, progress, and expectations of an organization. • Private accountant — An accountant who works for a single firm, government agency, or nonprofit organization. • Public accountant — An accountant who provides accounting services to individuals or businesses on a fee basis. • Certified public accountant (CPA) — An accountant who passes a series of examinations established by the American Institute of Certified Public Accountants (AICPA). • Dodd-Frank Wall Street Reform and Consumer Protection Act increased financial regulation by increasing the power of the Public Company Accounting Oversight Board. • Act was brought on by the recent financial crisis. Managerial Accounting • Managerial accounting — Accounting used to provide information and analyses to managers within the organization to assist them in decision making. • Managerial accounting is involved with: • Costs of production • Costs of marketing • Preparation and control of budgets • Minimizing tax liabilities Auditing • Auditing — The job of reviewing and evaluating the information used to prepare a company's financial statements. • Independent audit — An evaluation and unbiased opinion about the accuracy of a company's financial statements. Tax Accounting • Tax accountants — An accountant trained in tax law and responsible for preparing tax returns or developing tax strategies. Government and Not-for-Profit Accounting • Government and not-for-profit accounting — Accounting system for organizations whose purpose is not generating a profit but serving ratepayers, taxpayers, and others according to a duly approved budget.

What Financial Managers Do

Financial managers are responsible for: Auditing Managing taxes Advising top management on financial matters Collecting funds (credit management) Controlling funds (funds management) Obtaining funds Budgeting Planning

Financial Planning

Financial planning involves analyzing short-term and long-term money flows to and from the company. Three key steps of financial planning: 1.Forecasting the firm's short-term and long-term financial needs 2.Developing budgets to meet those needs 3.Establishing financial controls to see if the company is achieving its goals Forecasting Financial Needs •Short-term forecast — Predicts revenues, costs, and expenses for a period of one year or less. •Cash flow forecast — Predicts the cash inflows and outflows in future periods, usually months or quarters. •Long-term forecast — Predicts revenues, costs, and expenses for a period longer than one year and sometimes as long as five or ten years. Working with the Budget Process •Budget — A financial plan that sets forth management's expectations and, on the basis of those expectations, allocates the use of specific resources throughout the firm. •Budgets depend heavily on the balance sheet, income statement, statement of cash flows, and short-term and long-term financial forecasts. •The budget is the guide for financial operations and expected financial needs. •Capital budget — Highlights a firm's spending plans for major asset purchases that often require large sums of money. •Cash budget — Estimates cash inflows and outflows during a particular period like a month or quarter. •Operating (or master) budget — Ties together all the firm's other budgets and summarizes its proposed financial activities. Establishing Financial Controls •Financial control — A process in which a firm periodically compares its actual revenues, costs, and expenses with its budget.

Understanding Key Financial Statements

Financial statement — A summary of all the transactions that have occurred over a particular period. Key financial statements of business are: • Balance sheet • Income statement • Statement of cash flows The Fundamental Accounting Equation • Fundamental accounting equation — The basis for the balance sheet. • The equation must always be balanced and includes the formula: • Assets = Liabilities + Owners Equity The Balance Sheet • Balance sheet — Financial statement that reports a firm's financial condition at a specific time and is composed of three major accounts: assets, liabilities, and owners' equity. Classifying Assets • Assets — Economic resources (things of value) owned by a firm; items can be tangible or intangible. • Liquidity — The ease with which an asset can be converted into cash. How quickly you can get back your invested funds if you want or need them. • Three categories: 1. Current assets — Items that can or will be converted into cash within one year. 2. Fixed assets — Assets that are relatively permanent, such as land, buildings, and equipment. 3. Intangible assets — Long-term assets (e.g., patents, trademarks, copyrights) that have no physical form but do have value. Liabilities and Owners' Equity Accounts • Liabilities — What the business owes to others (debts). • Common liability accounts: 1. Accounts payable — Current liabilities involving money owed to others for merchandise or services purchased on credit but not yet paid for. 2. Notes payable — Short-term or long-term liabilities that a business promises to pay by a certain date. 3. Bonds payable — Long-term liabilities that represent money lent to the firm that must be paid back. • Owners' equity — The amount of the business that belongs to the owners minus any liabilities owed by the business. • Retained earnings — The accumulated earnings from a firm's profitable operations that were reinvested in the business and not paid out to stockholders in dividends. The Income Statement • Income statement — The financial statement that shows a firm's profit after costs, expenses, and taxes; it summarizes all of the resources that have come into the firm (revenue), all the resources that have left the firm, expenses, and the resulting net income or net loss. • Net income or net loss — Revenue left over after all costs and expenses, including taxes, are paid. • The formula for the income statement: Revenue minus Cost of goods sold minus Gross profit (gross margin) minus Operating expenses = Net income before taxes minus Taxes = Net income or loss Revenue • Revenue is the monetary value a firm received for goods sold, services rendered, or other payments. Cost of Goods Sold • Cost of goods sold (or manufactured) — A measure of the cost of merchandise sold or cost of raw materials and supplies used for producing items for resale. • Gross profit (or gross margin) — How much a firm earned by buying (or making) and selling merchandise. Operating Expenses • Operating expenses — Costs involved in operating a business, such as rent, utilities, and salaries. • Depreciation — The systematic write-off of the cost of a tangible asset over its estimated useful life. The Statement of Cash Flows • Statement of cash flows — Financial statement that reports cash receipts and disbursements related to a firm's three major activities • Three major activities of a firm: 1. Operations 2. Investments 3. Financing The Need for Cash Flow Analysis • Cash flow — The difference between cash coming in and cash going out of a business. • Managing cash flow is a key consideration of a business.

Investing in Bonds

First-time bond investors generally ask two questions: 1.Do I have to hold a bond until the maturity date? 2.How can I assess the investment risk of a particular bond issue? Investing in High-Risk (Junk) Bonds •Junk bonds — High-risk, high-interest bonds.

Preferred stock can have other special features that common stock doesn't have.

For example it can be callable, which means preferred stockholders could be required to sell their shares back to the corporation. Preferred stock can also be converted to shares of common stock (but not the other way around), and it can be cumulative. That is, if one or more dividends are not paid when promised, they accumulate and the corporation must pay them in full at a later date before it can distribute any common stock dividends.

Obtaining Long-Term Financing

In setting long-term financing objectives, financial managers generally ask three questions: 1.What are the organization's long-term goals and objectives? 2.What funds do we need to achieve the firm's long-term goals and objectives? 3.What sources of long-term funding (capital) are available, and which will best fit our needs? Debt Financing •Debt Financing by Borrowing from Lending Institutions: -Long-term financing loans generally come due within 3 to 7 years but may extend to 15 or 20 years. -Term-loan agreement — A promissory note that requires the borrower to repay the loan in specified installments. -A major advantage is that loan interest is tax-deductible. -Risk/return trade-off — The principle that the greater the risk a lender takes in making a loan, the higher the interest rate required. •Debt Financing by Issuing Bonds: -Secured bond — A bond issued with some form of collateral, such as real estate. -Unsecured (debenture) bond — A bond backed only by the reputation of the issuer. Not backed by any collateral such as equipment. Equity Financing •Equity Financing by Selling Stock •Equity Financing from Retained Earnings •Equity Financing from Venture Capital •Venture capital — Money that is invested in new or emerging companies that are perceived as having great profit potential. Comparing Debt and Equity Financing •Leverage — Raising needed funds through borrowing to increase the firm's rate of return. •Cost of capital — The rate of return a company must earn in order to meet the demands of its lenders and expectations of its equity holders. Lessons Learned from the Financial Crisis and Great Recession •The recent financial crisis was the worst fall since the Great Depression. •Led to the passage of sweeping financial regulatory reform. Government is increasing involvement and intervention.

The Accounting System

Inputs • Accounting documents • Sales documents • Purchasing documents • Shipping documents • Payroll records • Bank records • Travel records • Entertainment records Processing 1. Entries are made into journals: recording 2. The effects of these journal entries are transferred or posted into ledgers: classifying 3. All accounts are summarized Outputs • Financial statements • Balance sheet • Income statement • Statement of cash flows • Other reports (e.g., annual reports)

Comparing Investments

Investment: Bonds Preferred stock Common stock Mutual funds ETFs Degree of Risk: Low Medium High Medium Medium Expected income: Secure Steady Variable Variable Variable Possible growth (capital gain): Little Little Good Good Good If you were thinking about investing in the securities market, would you prefer individual stocks, mutual funds, or ETF's? Explain your choice by comparing the advantages and disadvantages of each.

Understanding Stock Quotations

It lists the previous close, open, bid, ask, day's range, 52 week range, volume, average volume, market cap, beta, PE ratio, EPS, earnings date, dividend and yield, ex-dividend date, and one year target estimate.

Cleaning Up the Street

Key Dodd-Frank Provisions •Gave the government power to seize and shutter large financial institutions on the verge of collapse. •Put derivatives and complicated financial deals (including those that packaged subprime mortgages) under strict governmental oversight. •Required hedge funds to register with the SEC and provide information about trades and portfolio holdings. •Created the Consumer Financial Protection Bureau to watch over the interests of American consumers by reviewing and enforcing federal financial laws.

The Need for Operating Funds

Key needs for operational funds in a firm include: •Managing day-by-day needs of the business •Controlling credit operations •Acquiring needed inventory •Making capital expenditures -Capital expenditures — Major investments in either tangible long-term assets such as land, buildings, and equipment or intangible assets such as patents, trademarks, and copyrights. Alternative Sources of Funds •Debt financing — Funds raised through various forms of borrowing that must be repaid. •Equity financing — Money raised from within the firm, from operations or through the sale of ownership in the firm (stock or venture capital). •Short-term financing — Funds needed for a year or less. •Long-term financing — Funds needed for more than a year.

How Businesses Raise Capital by Issuing Bonds

Learning the Language of Bonds •Bond — A corporate certificate indicating that a person has lent money to a firm. •Principal — The face value of the bond. •Maturity date — The exact date the issuer of a bond must pay the principal to the bondholder. •Interest — The payment the issuer of the bond makes to the bondholders for use of the borrowed money. Advantages of Issuing Bonds •Bondholders are creditors, not owners, of the firm and cannot vote on corporate matters. •Bond interest is tax-deductible. •Bonds are a temporary source of funding and are eventually repaid. •Bonds can be repaid before the maturity date if they are callable. Disadvantages of Issuing Bonds •Bonds increase debt and can affect the market's perception of the firm. •Paying interest on bonds is a legal obligation. If interest is not paid, bondholders can take legal action. The face value of the bond must be repaid on the maturity date Different Classes of Bonds •Unsecured bonds (debenture bonds) are not backed by specific collateral. •Secured bonds are backed by collateral such as land or equipment. Special Bond Features •Sinking fund — Reserve account in which the issuer periodically retires some part of the bond principal prior to maturity so that enough capital will be accumulated by the maturity date to pay off the bond. •Callable bonds permit bond issuers to pay off the principal before the maturity date. •Convertible bonds allow bondholders to convert their bonds into shares of common stock.

International Banking and Banking Services

Making Transactions in Other Countries •Letter of credit — A promise by the bank to pay the seller a given amount if certain conditions are met. •Banker's acceptance — A promise that the bank will pay some specified amount at a particular time. •Money exchange allows companies to go to a bank and exchange currencies to use in a particular country (i.e. dollars for euros). The World Bank and the International Monetary Fund •World Bank — The bank primarily responsible for financing economic development; also known as the International Bank for Reconstruction and Development. Lends most of its money to less-developed nations to improve their productivity and help raise standards of living and quality of life. •International Monetary Fund (IMF) — Organization that assists the smooth flow of money among nations. Fosters cooperative monetary policies that stabilize the exchange of one national currency for another. -About 189 countries are a part of the IMF.

Bond Ratings ?

Moody's- Aaa Aa A Baa Ba B Caa Ca C Standard & Poor's- AAA AA A BBB BB B CCC, CC C D Fitch Ratings- AAA AA A BBB BB B CCC DDD D Descriptions: Highest quality (lowest default risk) High quality Upper medium grade Medium grade Lower medium grade Speculative Poor (high default risk) Highly speculative Lowest grade

Investing in Mutual Funds and Exchange-Traded Funds

Mutual fund — An organization that buys stocks and bonds and then sells shares in those securities to the public. Permit investors to buy and sell shares only at the close of the trading day. •The fund pools investors' money and buys stocks according to the fund's purpose. Exchange-traded funds (ETFs) — Collections of stocks that are traded on exchanges but are traded more like individual stocks than like mutual funds. Can be purchased or sold at any time during the trading day.

NASDAQ evolved from the _ market but is no longer part of it

OTC

Investing in Stocks

Perceptions of the Market •Bulls — Investors who believe stock prices are going to rise. •Bears — Investors who expect stock prices to decline. Selecting Stocks •Capital gains — The positive difference between the purchase price of a stock and its sale price. •Investors can also choose stocks according to their strategy: -Blue-chip stocks -Growth stocks -Income stocks -Penny stocks Stock Splits •Stock splits — An action by a company that gives stockholders two or more shares of stock for each one they own. To decrease the market value per share of a common stock. •Splits cause no change in the firm's ownership structure and no immediate change in the investment's value. •Firms can never be forced to spilt their stocks. Buying Stock on Margin •Buying stock on margin — Purchasing stocks by borrowing some of the purchase cost from the brokerage firm. •Margin is the portion of the stock's purchase price that the investor must pay with their own money. •If a broker issues a margin call, the investor has to come up with money to cover losses. Understanding Stock Quotations -Information in a quote includes: •Highest and lowest price for that day •High and low over the past 52 weeks •Dividend paid •Dividend yield •Ratios such as price/earnings ratio •Earnings per share •Number of shares traded

Analyzing Financial Performance Using Ratios

Ratio Analysis — The assessment of a firm's financial condition using calculations and interpretations of financial ratios developed from the firm's financial statements. Key ratios include: • Liquidity ratios • Leverage (debt) ratios • Profitability (performance) ratios • Activity ratios Liquidity Ratios • Liquidity ratios measure a firm's ability to turn assets into cash to pay its short-term debts. • Key ratios include: • Current ratio • Acid-test ratio • This information is found on the firm's balance sheet. Leverage (Debt) Ratios • Leverage ratios measure the degree to which a firm relies on borrowed funds in its operations. • Key ratios include: - Debt to owner's equity ratio • Important to compare the ratios to those of other firms. Profitability (Performance) Ratios • Profitability ratios measure how effectively a firm's managers are using the firm's various resources to achieve profits. • Key ratios include: - Earnings per share (EPS) - Return on sales - Return on equity • Profitability ratios are very closely watched as measurements of growth and management performance. Activity Ratios • Activity ratios measure how effectively management is turning over inventory. • Key ratios include: - Inventory turnover ratio • Rates of inventory turnover vary from industry to industry.

How the Federal Reserve Controls the Money Supply

Reserve Requirements: A.Increase the reserve requirement: Banks put more money into the Fed, reducing money supply; thus, there is less money available to lend to customers. This has the long-term effect of slowing the economy. B.Decrease the reserve requirement: Banks put less money into the Fed, increasing the money supply; thus, there is more money available to lend to customers. This has the long-term effect of speeding up the economy. Open-Market Operations: A.Fed sells bonds: Money flows from the economy to the Fed. This has the long-term effect of slowing the economy. B.Fed buys bonds: Money flows into the economy from the Fed. This has the long-term effect of speeding up the economy. Managing the Discount Rate A.Rate increases: Banks borrow less from the Fed; thus, there is less money to lend. This has the long-term effect of slowing the economy. B.Rate decreases: Banks borrow more from the Fed; thus, there is more money to lend. This has the long-term effect of speeding up the economy.

The Function of Securities Markets

Securities markets are financial marketplaces for stocks and bonds and serve two primary functions: 1.Assist businesses in finding long-term funding to finance capital needs 2.Provide private investors a place to buy and sell securities such as stocks and bonds Types of Securities Markets (Divided into primary and secondary markets) •Primary markets handle the sale of new securities. •Secondary markets handle the trading of securities between investors, with the proceeds of the sale going to the seller. Initial public offering (IPO) — The first public offering of a corporation's stock. The Role of Investment Bankers •Investment bankers — Specialists who assist in the issue and sale of new securities. •Institutional investors — Large organizations, such as pension funds, mutual funds, and insurance companies that invest their own funds or the funds of others.f

Financial Planning

Short-term forecasting and long-term forecasting help to develop the financial plan. The financial plan is used to develop an operating (master) budget, a capital budget, and a cash budget. Financial controls are put in place and feedback from financial controls goes back to the original financial plan.

Why Firms Need Funds

Short-term funds: •Monthly expenses •Unanticipated emergencies •Cash flow problems •Expansion of current inventory •Temporary promotional programs Long-term funds: •New-product development •Replacement of capital equipment •Mergers or acquisitions •Expansion into new markets (domestic or global) New facilities

Stock Exchanges

Stock exchange — An organization whose members can buy and sell (exchange) securities for companies and investors. Over-the-counter (OTC) market — Exchange that provides a means to trade stocks not listed on the national exchanges. NASDAQ (national Association of Securities Dealers Automated Quotations)— A nationwide electronic system that communicates over-the-counter trades to brokers. Securities Regulations and the Securities and Exchange Commission •Securities and Exchange Commission (SEC) — Federal agency that has responsibility for regulating the various exchanges. •It was created in 1934 through the Securities and Exchange Act. •Prospectus — A condensed version of economic and financial information that a company must file with the SEC before issuing stock; the prospectus must be sent to prospective investors. Foreign Stock Exchanges •Investors can buy securities from companies almost anywhere in the world. Foreign investors can also invest in U.S. securities.

How Investors Buy Securities

Stockbroker — A registered representative who works as a market intermediary to buy and sell securities for clients. Investing through Online Brokers •Online trading services, such as TD Ameritrade, E*Trade, and Fidelity, offer securities trading services online to buy and sell stocks and bonds. •Online brokers can charge much lower trading fees. Choosing the Right Investment Strategy •Consider five criteria when selecting investment options: 1.Investment risk 2.Yield 3.Duration 4.Liquidity 5.Tax consequences (how the investment affects your tax situation) Reducing Risk by Diversifying Investments •Diversification — Buying several different investment alternatives to spread the risk of investing. •If diversifying, an investor may put: -25 percent of his or her money into U.S. growth stocks -25 percent in government bonds -25 percent in dividend-paying stocks -10 percent in an international mutual fund -The rest in a savings account

How Businesses Raise Capital by Selling Stock

Stocks — Shares of ownership in a company. Stock certificate — Evidence of stock ownership that specifies the name of the company, the number of shares it represents, and the type of stock being issued. Dividends — Part of a firm's profits that the firm may distribute to stockholders as either cash payments or additional shares of stock. Advantages of Issuing Stock •Stockholders are owners of a firm and never have to be repaid their investment. •There is no legal obligation to pay dividends. •Issuing stock can improve a firm's balance sheet since stock creates no debt. Disadvantages of Issuing Stock •Stockholders have the right to vote for a company's board of directors. Issuing new shares of stock can thus alter the control of the firm. •Dividends are paid from after-tax profits and are not tax-deductible. -Profits are shared among more stockholders. •The need to keep stockholders happy can affect managers' decisions. Issuing Shares of Common Stock •Common stock — The most basic form of ownership in a firm; it confers voting rights and the right to share in the firm's profits through dividends, if offered by the firm's board of directors. Issuing Shares of Preferred Stock •Preferred stock — Stock that gives its owners preference in the payment of dividends and an earlier claim on assets than common stockholders if the company is forced out of business and its assets sold. •Preferred stock can also be: -Callable -Convertible -Cumulative

Using Technology to Make Banking More Efficient

Technological Advances •Electronic funds transfer (EFT) system — Computerized system that electronically performs financial transactions such as making purchases, paying bills, and receiving paychecks. •Debit card — An electronic funds transfer tool that serves the same function as checks; it withdrawals funds from a checking account. •Smart card — An electric funds transfer tool that is a combination of a credit card, debit card, phone card, driver's license card, and more. Other conveniences include direct deposit and direct payment.

The History of Banking and the Need for the Fed

The Establishment of the Federal Reserve System •A cash shortage problem in 1907 led to the creation of the Federal Reserve System. •Under the Federal Reserve Act of 1913, all federally chartered banks had to join the Federal Reserve. Banking and the Great Depression •The stock market crash led to bank failures in the early 1930s. •In 1933 and 1935, Congress passed legislation to strengthen the banking system, including the establishment of federal deposit insurance.

The Original Dow and Current Dow

The Original Dow 12: American Cotton Oil American Sugar Refining Co. American Tobacco Chicago Gas Distilling and Cattle Feeding Co. General Electric Co. Laclede Gas Light Co. National Lead North American Co. Tennessee Coal, Iron and Railroad Co. U.S. Leather U.S. Rubber Co. The 30 Current Dow Companies: American Express Apple Boeing Caterpillar Chevron Cisco Coca-Cola DuPont ExxonMobil General Electric Goldman Sachs Home Depot IBM Intel Johnson and Johnson JPMorgan Chase McDonald's Merck Microsoft 3M Nike Pfizer Proctor and Gamble Travelers United Health Group United Technologies Verizon Visa Wal-Mart Stores Walt Disney

Investment Risk

The chance that an investment will be worth less at some future time than it's worth now.

Bond prices generally fluctuate inversely with current market interest rates. This means as interest rates go up, bond prices fall, and vice versa.

This means as interest rates go up, bond prices fall, and vice versa.

Obtaining Short-Term Financing

Trade Credit •Trade credit — The practice of buying goods and services now and paying for them later. •Businesses often get terms such as 2/10, net 30 when receiving trade credit. •Promissory note — A written agreement with a promise to pay a supplier a specific sum of money at a definite time. Family and Friends •Many small firms obtain short-term financing from friends and family. •If asking for help from family or friends, it's important both parties: 1.Agree to specific loan terms 2.Put the agreement in writing 3.Arrange for repayment the same way they would for a bank loan Commercial Banks •Banks generally prefer to lend short-term money to larger, established businesses because they are sensitive to risk. •During difficult economic times, bank loans can virtually disappear. Different Forms of Short-Term Loans •Secured loan — Backed by collateral (something valuable, such as property). •Unsecured loan — Doesn't require any collateral. •Line of credit — Given amount of unsecured short-term funds a bank will lend to a business, provided the funds are readily available. Factoring Accounts Receivable •Factoring — The process of selling accounts receivable for cash. •Factors charge more than banks, but many small businesses don't qualify for loans. Commercial Paper •Commercial paper — Unsecured promissory notes, in amounts of $100,000+ that come due in 270 days or less. •Since commercial paper is unsecured, only financially stable firms are able to sell it. Credit Cards •It is estimated that one-third of all small firms use credit cards to finance their businesses. •Credit cards are convenient but costly for a small business.

a firm's cash must be available in the correct amount needed and on the correct date to meet operational needs

True

Types of Government Securities that Compete with Corporate Bonds

U.S. government bond: Issued by the federal government; considered the safest type of bond investment Treasury bill (T-bill): Matures in less than a year; issued with a minimum denomination of one thousand dollars Treasury note: Matures in 10 years or less; sold in denominations of one thousand dollars up to one million dollars Treasury bond: Matures in 25 years or more; sold in denominations of one thousand dollars up to one million dollars Municipal bond: Issued by states, cities, counties, and other state and local government agencies; usually exempt from federal taxes Yankee bond: Issued by a foreign government; payable in U.S. dollars

In which of the following industries is factoring common?

U.S. industries and global trade ventures

Users of Accounting Information and the Required Reports

Users: Type of Report Government taxing authorities (e.g., the Internal Revenue Service): Tax returns Government regulatory agencies: Required reports People interested in the organization's income and financial position (e.g., owners, creditors, financial analysts, suppliers): Financial statements found in annual reports (e.g., income statement, balance sheet, statement of cash flows) Managers of the firm: Financial statements and various internally distributed financial reports

The Role of Accounting Information

What Is Accounting? • Accounting — The recording, classifying, summarizing, and interpreting of financial events and transactions to provide management and other interested parties the information they need to make good decisions. • Outside parties—such as employees, owners, creditors, unions, investors, and the government—make use of a firm's accounting information.

Why Money Is Important

What Is Money? •Money — Anything people generally accept as payment for goods and services. •Barter — The direct trading of goods or services for other goods or services. •Standards for a useful form of money: -Portability -Divisibility -Stability -Durability -Uniqueness •Electronic money (e-money) is a newer form. •Money supply — The amount of money the Federal Reserve Bank makes available for people to buy goods and services. •The money supply is referred to as: -M1 — Money that can be accessed quickly and easily (coins, paper money, traveler's checks, etc.). -M2 — Money included in M-1 plus money that may take a little more time to obtain (savings accounts, money market accounts, mutual funds, certificate of deposit, etc.). -M3 — M2 plus big deposits like institutional money market funds. Managing Inflation and the Money Supply •Inflation is sometimes called "too much money chasing too few goods." •In deflation, prices go down because of a surplus of goods and services compared to money. •The size of the money supply can affect employment and economic growth or decline. The Global Exchange of Money •Falling dollar value: The amount of goods and services you can buy with a dollar decreases. •Rising dollar value: The amount of goods and services you can buy with a dollar increases. •What makes the dollar fall or rise is the position of the U.S. economy relative to other global economies.

The Banking Crisis and How the Government Protects Your Money

Who Was Responsible? •Some believe the Fed kept the cost of borrowing too low. •Some believe Congress pressured banks to make risky loans. •Banks divided portfolios of mortgages up and sold mortgage-backed securities. •Some believe the Fed and the Securities and Exchange Commission failed to issue sufficient warnings. Protecting Your Funds •Federal Deposit Insurance Corporation (FDIC) — An independent agency of the U.S. government that insures bank deposits up to $250,000. •Savings Association Insurance Fund (SAIF) — Part of the FDIC that insures holders of accounts in savings and loan associations. •National Credit Union Administration (NCUA) — Provides up to $250,000 coverage per individual depositor per institution.

no-load fund

a mutual fund that charges no commission

index fund

a mutual fund with a portfolio that matches a particular market index

a promise to pay a person or firm a certain amount at a specified time is

a promissory note

which of the following should be required in every loan agreement

arrange for repayment, be in writing, and something else I forgot

reasons a firm should stay in close touch with its banks include

banks like to see regular financial statements from borrowers, and banks may assist in spotting cash flow problems

Stocks issued by higher-quality companies such as Coca-Cola, Johnson & Johnson, and IBM are referred to as _ stocks (a term derived from poker where the highest value chip was the blue chip).

blue-chip

the _ of _ of the federal reserve system sets margin rates in the us markets

board of governors

the current ratio is the ratio of current assets to current liabilities, whereas the acid-test ratio is the ratio of _, accounts receivable, and marketable securities to current liabilities

cash

The check _ function of the Federal Reserve enables banks to settle demand deposits between member banks

clearing

Which of the following was considered the cause of the market turmoil of 2008?

collapsing of the real estate market

which of the following is a factor in setting a long term interest rate

collateral, market interest rates, and firm's credit rating

_ _ are usually issued in units of $1,000

corporate bonds

the bond interest is sometimes called

coupon rate

services that many commercial banks offer customers include

credit cards, financial counseling, and automated teller machines

When preferred shareholders are due any skipped dividend payments before common stock holders can be paid, they hold which type of stock?

cumulative preferred

An increase in the reserve requirement will _ the amount of money available for lending to customers

decrease

the purpose of the FASB is to

define the GAAP (generally accepted accounting principles)

Mutual fund managers pick what they consider to be the best stocks and bonds available and help investors

diversify their investments and change investments more easily

Common stockholder rights

elect members of the company's board of directors and vote on important issues affecting the company, and share in the firm's profits through dividends, if approved by the firm's board of directors.

Today, bonds are registered to specific owners and changes in ownership are recorded

electronically

which of the following is on a bond

face value (principal), maturity date, and bond's interest rate

Having voting rights in a corporation allows common stockholders to

influence corporate policy because the board members they elect choose the firm's top management and make major policy decisions.

Careful control of _ costs allows a firm to maintain correct levels of stock and product

inventory

advantages of mutual funds

investors can buy directly from the fund and avoid broker fees, it is simple to change your investment objectives, and they provide professional investment management

Thanks to expanded communications and the relaxation of many legal barriers,

investors can buy securities from companies almost anywhere in the world.

which of the following are key benefits to investors in investing in mutual fund or ETF?

it is managed by a financial specialist for a fee, and it offers investors a way to spread the risk of stock and bond ownership

it is better to go to banks instead of family and friends for business loans because

loans from family can hurt family relationships, and banks can assist the business in analyzing problems

_ forecasts will look at all major inflows and outflows of the firm for a period of more than one year.

long-term

commercial finance companies take _ risks than banks and charge _ interest rates

more, higher

most companies issue _ _ stock because the par values do not reflect the market value of the stock

no par

methods commonly used in efficient credit procedures include

offering discounts for cash payments, offering cash discounts for prompt payment, and studying payment history of potential customers to assess risk

Preferred stock may be issued with a _ value that becomes the base for a fixed dividend the firm is willing to pay.

par

a promissory note states that the borrower will

pay at a certain time, pay a specific amount of money, and pay the holder

Dividends are generally paid

quarterly

independent rating firms such as standard & poor's and moody's investors service rate bonds according to their degree of

risk

not-for-profit organizations need accounting professionals to

show that their money is being spent properly, show that their funds are well-managed, and show donors that money is spent for the designated cause

cash flow analysis is especially important for which of the following

small businesses

what is the primary report given to the IRS by an organization

tax return

how do cash flow problems usually start?

the firm uses up its credit

Journal

the record book or computer program where accounting data are first entered

which of the following about commercial finance companies is true?

they charge higher rates than banks, they make short-term loans, and they want borrowers to offer tangible assets as collateral

sinking funds are attractive to both issuing firms and investors because

they provide for an orderly repayment of a bond issue, they reduce the risk the bond will not be repaid, they support the market price of the bond because they reduce the risk the bonds will not be repaid.

a positive aspect of a firm accepting credit cards is that the bank carries the risk of the credit, not the firm

true

smaller firms often have more cash flow problems than larger ones because they have more limited access to capital

true

Though bond interest is quoted for an entire year, it is usually paid in _ installments, and the rate generally cannot be changed

two

to issue stock, a public corporation must meet the requirements of

various state agencies and the SEC (Security and Exchange Commission)

The Federal Reserve and the Securities and Exchange Commission were accused of failing their regulatory duties by not issuing sufficient

warnings

Disadvantages of bartering include the fact that

you have to carry around goods that are hard to transport, and your items of value may have a limited life

Key Provisions of the Sarbanes-Oxley Act

• Prohibits accounting firms from providing certain nonauditing work to companies they audit. • Strengthens the protection for whistleblowers who report wrongful actions of company officers. • Requires company CEOs and CFOs to certify the accuracy of financial reports and imparts strict penalties for any violation of securities reporting. • Prohibits corporate loans to directors and executives of the company. • Establishes the five-member Public Company Accounting Oversight Board (PCAOB) under the Securities and Exchange Commission (SEC) to oversee the accounting industry. • Stipulates that altering or destroying key audit documents will result in felony charges and significant criminal penalties.