BUS 101 Midterm

What banks want to know

1. How much money do you want to borrow? 2. Why do you want the money and how will it be used? 3. What is the primary source that will generate the funds to repay the loan? 4. How will the loan be secured? 5. Who will guarantee the loan?

Acquisition

A corporate restructuring in which one firm buys another

Merger

A corporate restructuring that occurs when two formerly independent business entities combine to form a new organization.

Federal Deposit Insurance Corporation (FDIC)

A federal agency that insure deposits in banks and thrift institutions for up to 250,000 per customer per bank.

Line of credit

A financial arrangement between a firm and a bank in which the bank pre-approves credit up to a specified limit, provided that the firm maintains an acceptable credit rating

Business Plan

A formal written document that describes a business concept, outlines core business objectives, and details strategies and timelines for achieving those objectives.

Franchise

A licensing arrangement under which a franchisor allows franchisees to use its name, trademark, products, business methods, and other property in exchange for monetary payments and other considerations. Advantages 1. Less risk 2. Training and support 3. Brand recognition 4. Easier access to funding Disadvantages 1. Cost 2. Lack of control 3. Negative halo effect 4. Growth challenges 5. Restriction on sale 6. Poor execution

Budgeting

A management tool that explicitly shows how a firm will acquire and use the resources needed to achieve its goals over a specific time period.

Monopolistic

A market structure in which many companies sell products that are differentiated. (Barrier to entry is low)

Pure Market

A market structure with many competitors selling virtually identical products. (Barriers to entry are quite low)

Monopoly

A market structure with one producer completely dominating the industry, leaving no room for any significant competitors. (Barriers to entry then to be virtually insurmountable)

Oligopoly

A market structure with only a handful of competitors selling products that can be similar or different. (Barriers to enter are typically high)

Consumer Price Index (CPI)

A measure of inflation that evaluates the change in the weighted-average price of goods and services that the average consumer buys each month.

PPI (Producer Price Index)

A measure of inflation that evaluates the change over time in the weighted-average wholesale prices.

Contraction

A period of economic downturn, marked by rising unemployment and falling business production.

Stock Exchange

A place where shares in corporations are bought and sold through an organized system.

Stock Index

A statistic that tracks how the prices of a specific set of stocks have changed.

Partnership

A voluntary agreement under which two or more people act as co-owners of a business.

Certificate of Deposit

An interest-earning time deposit that requires the funds to remain deposited for a fixed term. Withdrawal of the funds before the therm expires results in a financial penalty.

GATT (General Agreement on Tariffs and Trade)

An international trade agreement that has taken bold steps to lower tariffs and promote free trade worldwide.

Horizontal Analysis

Analysis of financial statements that compares account values reported on these statements over two or more years to identify changes and trends.

Absolute Advantage

Benefit a country has in a given industry, can produce more a product

comparative advantage

Benefits a country has in a given industry if it can make products at a lower opportunity cost then other countries.

Bonds vs. Stocks

Bonds (Debt Financing) 1.Secured or Debenture 2.Must be repaid on maturity date 3.Interest must be paid whenever specified Stock (Equity Financing) 1.Preferred or Common 2.Investment never has to be repaid 3.Not legally obligated to pay dividends

Venture Capital Firms

Companies that invest in start-up businesses with high growth potential in exchange for a share of ownership.

Deontological Ethics

Deontological ethics holds that at least some acts are morally obligatory regardless of their consequences for human welfare.

Recession

Economic downturn marked by a decrease in the GDP for two consecutive quarters.

the five key components of the business environment

Economic, competitive, technological, social, and global environments

Teleological Ethics

Ethics based on the consequences. From a teleological standpoint, stealing, for example, would be deemed right or wrong depending on the consequences.

A corporation is a voluntary agreement under which two people act as co-owners of a business for profit. T or F

False

Private placements are usually more time consuming and complex than public offerings. T or F

False

Small businesses generate 50% of total employment in American inner cities. T or F

False

Term loans issued by commercial banks are popularly used by financial institutions and large corporations because they typically carry lower interest rates than commercial paper. T or F

False

The Securities and Exchange Commission (SEC) bans publicly traded corporations from making comparative financial statements. T or F

False

The owner of a sole proprietorship must share any after-tax profits with the company's shareholders. T or F

False

Monetary Policy

Federal Reserve decisions that shape the economy by influencing interest rates and the supply of money.

Micro economics

Focuses on smaller economic units such as individual consumers, families, and individual business.

Debt Capital

Funds raised through various forms of borrowing that must be repaid

Fiscal Policy

Government efforts to influence the economy through taxation and spending.

Angel Investors

Individuals who invest in start-up companies with high growth potential in exchange for a share of ownership.

Factors of production

Land, Labor, Capital, Technology, Entrepreneurship, and Knowledge

Demographics

Measurable characteristics of a population, pop size, age, gender, and race

Equity Capital

Money raised through the sale of ownership in the firm that does not have to be repaid, Includes retained earnings. (Stock Certificate)

Budget Surplus

Overage that occurs when revenue is higher than expenses over a given period of time

Common Stock vs. Preferred Stock

Preferred 1. Non-voting 2. Fixed dividends 3. Preference at liquidation Common 1. Voting 2. Dividend only available after preferred 3. No preference at liquidation

Productivity

Relation between the output of goods and services and the in put (resources needed)

Balance Sheet

Reports the financial position of a firm by identifying and reporting the value of the firm's: •Assets: Resources owned by a firm •Liabilities: Claims that outsiders have against a firm's assets •Owner's equity: Claims that a firm's owners have against their company's assets

GAAP (Generally accepted accounting principles)

Set of accounting standards used in the preparation of financial statements (the language of accounting)

T-Bills

Short-term marketable IOUs issued by the U.S. federal government.

Budget Deficit

Shortfall that occurs when expenses are higher than revenue over a given period of time.

Trade Credit

Spontaneous financing granted by sellers when they deliver goods and services to customers without requiring immediate payment.

corporate bylaws

The basic rules governing how a corporation is organized and how it conducts its business.

Managerial Accounting

The branch of accounting that provides reports and analysis to managers to help them make informed business decisions.

Articles of Incorporation

The document filed with a state government to establish the existence of a new corporation.

IPO (initial public offering)

The first time a company sells shares of its stock to the public.

Finance

The functional area of business that is concerned with finding the best sources and uses of financial capital.

Financial Capital

The funds a firm uses to acquire its assets and finance its operations.

Opportunity Cost

The opportunity of giving up the 2nd best choice when making a decision.

Retained Earnings

The part of a firm's net income that it reinvests.

Business Cycle

The periodic contraction and expansion that occur over time in virtually every economy.

Privatization

The process of converting government owned businesses to private ownership.

Macro economics

The study of a country's overall economic dynamics, such as the employment rate, the GDP, and taxation policies.

Economics

The study of the choices that people, companies, and governments make in allocating resources.

GDP

The total value of all final goods and services produced within a nations physical boundaries over a given period of time.

Balance sheets usually classify assets into at least two major categories: current assets and property, plant, and equipment assets. T or F

True

Exchange-traded funds (ETFs) allow investors to buy ownership in a market basket of many different securities. T or F

True

In the context of small businesses and the economy of a country, entrepreneurship rates are significantly lower in countries where it is hard to get fired. T or F

True

Passed during the early twenty-first century, the Sarbanes-Oxley Act included provisions to ensure that external auditors offered fair, unbiased opinions when they examined a company's financial statements. T or F

True

There is no limit on the number of partners who can participate in a general partnership. T or F

True

Joint Ventures

Two or more companies join forces, share resources, risks, and profits

What did NAFTA turn in to?

USMCA

According to the U.S. Small Business Administration (SBA), to officially count as "small," _____. a.the average revenue of a business should range from $0.75 million to $28.5 million b.the average revenue of a business should be between $30 million and $40 million c.the number of employees of a business should range from fewer than 50 to 100 d.a business should have at least 500 employees, excluding the self-employed

a

Betty ' s job entails detecting problems such as embezzlement, waste, mismanagement, and employee theft at her organization. In this case, Betty is a(n) _____. a. internal auditor b. forensic auditor c. certified public accountant d. government accountant

a

Exchange-traded funds and mutual funds account for: a. financial diversifications. b. financial liabilities. c. financial stagnancies. d. financial losses.

a

Firms buy commercial paper as part of their portfolio of cash equivalents because: a. it is a safe way to earn some interest. b. it specifies the benefits of long-term investment proposals. c. it is issued by the U.S. government. d. it establishes credit standards.

a

The main advantage of financial leverage is that: a.it magnifies the financial return on the investment of stockholders when times are good. b.it protects companies from predatory lending practices by financial institutions. c. it protects companies from going bankrupt. d. it forgoes the need for companies to pay their creditors.

a

Which of the following is a difference between limited liability companies (LLCs) and corporations? a. LLCs are subject to fewer reporting requirements than corporations. b. LLCs offer less flexibility than corporations in terms of tax treatment. c. Corporations are not required to hold board meetings, whereas LLCs must hold regular board meetings. d. Corporations can have any number of owners, whereas LLCs can have only a limited number of owners

a

Which of the following is an appealing benefit that entrepreneurs enjoy? a. The ability to set their own hours b. The guarantee of a fixed income c. Minimal workload d. Minimal risk

a

Which of the following is one of the reasons why many people prefer a sole proprietorship? a. Pride of ownership b. Unlimited liability c. Ease of transfer of ownership d. Permanence

a

Which of the following is true of stock exchanges? a. Each exchange establishes its own requirements for the securities it lists. b.Apart from the annual fee, exchanges do not require firms to pay any other fee for the stock listing. c.Electronic trading began with the establishment of the over-the-counter market. d.The stocks of privately traded corporations are listed and traded on these exchanges.

a

Sole Proprietorship

a business owned and managed by a single individual, majority of companies are sole proprietorship, earnings are treated as the owners income, and the same goes for debt. Advantages 1. Ease of formation 2. Retention of control 3. Pride of ownership 4. Retention of profits 5. Possible tax advantages (taxed only as income) Disadvantages 1. Limited financial resources 2. Unlimited liability 3. Limited ability to attract and maintain talented employees 4. Heavy workload and responsibilities 5. Lack of permanence

Non-profit

a company with a tax-exempt status because of the services that it provides, services are not conducted to make a profit

Infrastructure

a country's physical facilities that support economic activity

ethical dilemma

a decision that involves a conflict of values; every potential course of action has some significant negative consequences (ex. lie to keep someone from dying or allow them to die)

Corporation (C-Corp)

a form of business ownership in which the business is considered a legal entity that is separate and distinct from its owners. Advantages 1. Limited liability 2. Permanence 3. Ease of transfer of ownership 4. Ability to raise large amounts of financial capital 5. Ability to make use of specialized management Disadvantages 1. Expense and complexity of rotation and operation 2. Complications when operating in more than one state 3. Double taxation of earnings and additional taxes 4. More paperwork, more regulations, and less secrecy 5. Possible conflicts of interest

Common Market

a group of countries that have reduced or even eliminated tariffs, allowing for the free flow of goods among the member nations. (ex. EU)

World Trade Organization (WTO)

a permanent global institution to promote international trade and to settle international trade disputes

Partnership

a voluntary agreement under which two or more people act as co-owners of a business for profit. Advantages 1. Ability to pool financial resources 2. Ability to share responsibilities and capitalize on complementary skills 3. Ease of formation 4. Possible tax advantage (taxed as partners personal income) Disadvantages 1. Unlimited liability 2. Potential for disagreement 3. Lack of continuity 4. Difficulty in withdrawing from a partnership

As a current asset, firms use cash for _____. a. capital budgeting b. paying dividends c. establishing credit standards d. repaying debtors

b

Green Haven is an organization whose earnings are exempt from federal and state income taxes. Individuals who contribute money to the organization can avail the benefit of tax deduction. However, the organization is barred from distributing dividends to its members. Given this information, Green Haven is most likely a(n): a. C corporation. b. not-for-profit corporation. c. S corporation. d. statutory close corporation.

b

Scoopjoe, an ice cream brand in Wisconsin, has ten other outlets in Illinois, Michigan, and Ohio. As part of the agreement between Scoopjoe's main outlet and the other outlets, the former not only supplies raw materials to the latter but also provides help with site selection, training of staff, and finance. The given scenario exemplifies a: a. conglomerate merger. b. business format franchise. c. sole proprietorship. d. distributorship.

b

Sebastian is an employee at Plowell Inc. His duties include preparing reports and analyzing company data. He also appraises financial performances and verifies the accuracy and validity of the company's internal records. In this scenario, Sebastian's role is that of a _____ in the organization. a. certified fraud examiner b. management accountant c. social audit examiner d. forensic accountant

b

The owners of limited liability companies (LLCs) are called members because: a. they share the same interests in the firm as common stockholders. b. LLCs are neither corporations nor partnerships. c.they can only be individuals and not foreign investors or other corporations. d. LLCs are not considered separate and distinct from their owners.

b

The three kinds of basic financial statements that are prepared in financial accounting are: a. comfort letter, master budget, and credit statement. b. balance sheet, income statement, and statement of cash flows. c. pro forma report, request for proposal, and articles of incorporation. d. statement of debts, letter of credit, and articles of incorporation.

b

Unlike a line of credit, in a revolving credit agreement: a. a bank provides funds for no more than 90 days. b.a bank makes a binding commitment to provide a business with funds up to a specified credit limit at any time during the term of the agreement. c. the bank interest rate is allowed to float based on agreed-upon criteria. d.a bank agrees to make additional funds available as long as the principal and interest are paid.

b

When a company takes out a bank loan, or issues and sells corporate bonds, it is relying on _____. a. equity financing b. debt financing c. angel investor financing d. venture capital financing

b

Which of the following is a difference between a C corporation and an S corporation? a.The members of a C corporation have limited liability, whereas the members of an S corporation have unlimited liability. b.A C corporation is double taxed, whereas an S corporation is taxed as a partnership. c.A C corporation is taxed as a partnership, whereas an S corporation is double taxed. d.The members of a C corporation have unlimited liability, whereas the members of an S corporation enjoy limited liability.

b

Which of the following is an advantage of a C corporation? a. It is free from double taxation. b. Shareholders have limited liability in the firm. c. The members are entitled to choose the mode of tax treatment. d. Its formation is simple and inexpensive.

b

Which of the following is true of government accountants in the United States? a.They perform a narrow set of accounting functions solely for federal government agencies. b.They help ensure that a nation's banks and other financial institutions comply with the rules and regulations controlling their behavior. c. They do not need to adhere to the generally accepted accounting principles. d.They provide services such as tax preparation, external auditing, or management consulting to clients on a fee basis.

b

Which of the following statements is true of buying an established business? a. The chance of first-year failure is zero. b.Getting financing and credit is less challenging than when starting a business from scratch. c. Relationships with customers have to be established. d.There is more creative freedom than when starting a business from scratch.

b

An online food delivery service goes out of business owing to stiff competition. The company has long overdue taxes because of which its stockholders do not receive the proceeds of the company after its dissolution. In this case, the company is not able to fulfill the _____ of its stockholders. a. prima facie right b. preemptive right c. right to a residual claim on assets d. right to dividends and capital gain

c

Cartman owns convertible securities in OctoCore Corp. If the conversion ratio for the convertible securities is 37, it means that: a. Cartman can liquidate each convertible security that he owns for $37. b.Cartman can convert 37 percent of the convertible securities that he owns for shares of common stock. c.Cartman can exchange each convertible security that he owns for 37 shares of common stock. d.Cartman can resell the 37 percent of the convertible securities that he owns to other preferred stockholders.

c

Happta is a corporation with tax-exempt status. It has members but cannot have stockholders. Given this information, Happta is most likely a(n): a. S corporation. b. C corporation. c. not-for-profit corporation. d. statutory close corporation.

c

In the context of stock indices, which of the following is a difference between the Dow Jones Industrial Average (DJIA) and the Standard & Poor's 500 ( S&P 500) ? a. Unlike the DJIA, the S&P 500 is the most widely followed stock index. b. Unlike the S&P 500, the DJIA tracks stock prices of 100 U.S. corporations. c. Unlike the DJIA, the S&P 500 is a much broader index. d.Unlike the S&P 500, the companies included in the DJIA are small, upcoming American corporations.

c

Michael is a middle-aged professional who lost his job five months ago when his former employer downsized. He has actively been looking for work ever since but has not been able to find a job that utilizes his abilities or offers an income similar to his previous position. He is beginning to realize that the only way for him to survive his current situation is to start his own business. In this scenario, Michael will most likely become a(n) _____. a. angel investor b. baby boomer worker c. necessity entrepreneur d. venture capitalist

c

T he Small Business Administration (SBA) supports the _____, which provides free, comprehensive counseling for small businesses from qualified volunteers. a. Center for Strategic and International Studies b. American Veterans Center c. Service Corps of Retired Executives d. Humane Society of the United States

c

Which of the following is a popular cash equivalent? a. A capital asset b. A hedge fund c. Commercial paper d. Capital gain

c

Which of the following is an advantage of starting a business from scratch? a.Relationships with customers, suppliers, and other stakeholders are already established. b. Getting financing and credit is less challenging. c. You do not have to deal with a prior owner's bad decisions. d.Your concept, organizational structure, and operating practices are already in place.

c

_____ is a guaranteed line of credit in which a bank makes a binding commitment to provide a business with funds up to a specified credit limit at any time during the term of the agreement. a. Commercial paper b. A term loan agreement c. A revolving credit agreement d. Trade credit

c

Foreign outsourcing

contracting with foreign suppliers to produce products, usually at a fraction of the cost of domestic production

In the context of the deregulation during the 1980s and 1990s, critics argued that laws such as the Glass-Steagall Act and the Securities Exchange Act represented an onerous government intrusion into the financial sector that: a. resulted in the Great Depression. b. encouraged rampant and harmful product promotion. c. led to insider trading. d. stifled competition.

d

Jonathan is a common stockholder in an information technology firm. Owing to his right to a residual claim on assets, he is entitled to receive a share in the proceeds of the company that is proportionate to his ownership if the company: a. issues new stocks. b. earns extra profits. c. merges with another firm. d. goes out of business.

d

Lois wants to start an art gallery. However, because of lack of adequate funds, she decides to borrow money from a bank. The bank is hesitant to give money to Lois because it cannot verify whether her business would be able to earn enough profit to repay the borrowed amount within the stipulated period. However, after a thorough research, the bank grants her the money. In the given scenario, Lois uses _____ to fund her business. a. crowdfunding b. a credit card c. venture capital d. a loan

d

Miranti Nex, an automobile company, plans to invest in developing a hybrid car. It refrains from using loans from other firms and instead uses its own monetary resources to fund the project. Which of the following sources of long-term funds is being used by Miranti Nex in the given scenario? a. Corporate bonds b. Term loans c. Long-term debt d. Direct investments from owners

d

Norman owns a large number of shares in a telecommunications corporation. Despite that, he does not have the right to vote in a meeting held specifically to elect the CEO of the company. In this scenario, Norman is most likely a _____. a. common stockholder b. limited partner c. general partner d. preferred stockholder

d

The management of a sugar manufacturing company sets aside a sum of $50,000 in its budget for the purchase of new machinery that would double the production. In the given scenario, the management is in the process of planning the _____ of the company. a. marketing budget b. financial budget c. static budget d. operating budget

d

Tobit Financing offers short-term financing plans to other companies. It buys the accounts of other companies at a discount and collects the full amount from the customers of those companies. Which of the following short-term financing options is being provided by Tobit Financing in this scenario? a. Trade credit b. Short-term bank loans c. Commercial paper d. Factoring

d

Which of the following is an intimidating obstacle that small businesses face? a. Lack of personal customer service b. High overhead costs c. Complications in technology d. High health insurance costs

d

Which of the following is the main reason for private placements being less expensive than public offerings? a.In private placements, issuers of stocks can quote a high price to the limited number of investors and get high returns. b.In a private placement, the requirement for hiring an expensive investment bank to trade the stocks on behalf of the company is not mandatory. c.Private placements takes place within a firm itself, thereby avoiding expenditures on resources. d.Privately placed securities are exempt from the requirement to register with the Securities and Exchange Commission.

d

Which of the following statements is true of necessity entrepreneurship in high-income countries? a.Necessity entrepreneurship is a major contributor to the nation's economy. b. The risks of necessity entrepreneurship are low. c.Necessity entrepreneurship occurs when there are several sources of income. d. The rate of necessity entrepreneurship is low.

d

Which of the following statements is true of open-end mutual funds? a. Their shares are traded like stocks. b. They do not issue additional shares when demand increases. c. They have a fixed number of shares. d. They redeem old shares when investors want to cash in.

d

Who among the following people is most likely to become a necessity entrepreneur? a. A person who avoids challenges and financial risks b.A person who has recently graduated from college and has no work experience c. A person who has recently been promoted to a managerial position d. A person who experiences discrimination in the standard workplace

d

_____ provide analysis and prepare reports and financial statements for their organization. a. Government accountants b. Public accountants c. Forensic accountants d. Management accountants

d

_____ refers to financing that arises during the natural course of business without the need for special arrangements. a. Debt financing b. Equity financing c. Factoring d. Spontaneous financing

d

Depository Institutions

financial intermediaries that obtain funds by accepting checking and savings deposits from individuals, businesses, and other institutions and then lending those funds to borrowers Credit unions, Commercial banks, Savings and loan associations

Corporate Bonds

promissory notes issued by firms when they borrow money

Speed to Market

the rate at which a new product moves from conception to commercialization

Financial Accounting

•Branch of accounting that prepares financial statements for use by owners, creditors, suppliers, and other external stakeholders •Stakeholders need this information to analyze the financial condition of the firm over a period of time

Income Statement

•Reports revenues, expenses, and net income that resulted from a firm's operations over an accounting period •Revenue: Increases in assets that result from activities intended to earn income •Expenses: Resources that are used up as a result of business operations •Reflects the equation, Revenue − Expenses = Net income