Exam 2: Ch. 6-9

Inventory turnover ratio

(Costs of goods sold)/(average inventory)

Current ratio

(Current assets)/(current liabilities)

Earnings per-share ratio

(Net income)/(# of shares outstanding)

Franchise disclosure document (FDD)

A detailed description of all aspects of the franchise that the franchisor must provide to the franchisee at least 14 calendar days before the franchise agreement is signed.

Balance sheet

A financial statement that reports a financial position of a firm by identifying and reporting the value of the firms assets, why the ladies, and owners equity.

Corporation

A form of business ownership in which the business is considered a legal entity that is separate and distinct from its owners

Limited liability company (LLC)

A form of business ownership the offers both limited liability to the owners and flexible tax treatment.

S corporation

A form of corporation that avoids double taxation by having its income taxed as if it were a partnership.

Business plan

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

Limited liability partnership (LLP)

A formal partnership in which all partners have the right to participate in management and have a limited liability for company debts

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.

Budgeting

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

General partnership

A partnership in which all partners can take an active role in managing the business and have unlimited liability for any claims against the firm

Limited partnership

A partnership that includes at least one general partner who actively manages the company and excepts unlimited liability and one limited partner who gives it the right to actively manage a company in exchange for a limited liability

Master budget

A presentation of an organizations operational and financial budgets that represents the firms overall plan of action for a specific time.

Generally accepted accounting principles (GAAP)

A set of accounting standards that is used in the preparation of financial statements

Market niche

A small segment of the market with your competitors in the market as a whole. Market niches tends to be quite attractive to small firms.

Operating budgets

Budgets that communicate an organization's sales and production goals and the resources needed to achieve these goals

Financial budgets

Budgets that focus on the firms financial goals and identify the resources needed to achieve these goals

Liabilities

Claims that outsiders have against a firms assets

Venture-capital firms

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

Disadvantages of LLCs

Complexity of formation, annual franchise tax, foreign status in other states, limits on types of firms that conform, differences and state laws.

Financial ratio analysis

Computing ratios that compare values of key accounts listed on a firm's financial statements

Direct cost

Costs that are in care directly as the result of some specific cost object

Indirect costs

Costs that are the result of a firms general operations and are not directly tied to any specific cost object

Fixed costs

Costs that remain the same when the level of production changes within some relevant range

Variable costs

Costs that very directly with the level of production

Disadvantages of franchising

Costs, lack of control, negative halo effect, growth challenges, restrictions on sale, for execution.

Advantages of Nonprofit (or not for profit) corporation

Earnings are exempt from federal and state income taxes. Members and directors have limited liability. Individuals who contribute money or property to the nonprofit can take a tax deduction, making it easier for these organizations to raise funds from donations

Advantages of sole proprietorships

Ease of formation, retention of control, pride of ownership, possible tax advantage.

Disadvantages of C corporations

Expense and complexity of formation in operation, complications when operating in more than one state, double taxation of earnings and additional taxes, more paperwork more regulation and less secrecy, possible conflicts of interests.

Asset management ratios

Financial ratios that measure how effectively a firm is using its assets to generate revenues are Cash

Liquidity ratios

Financial ratios that measure the ability of a firm to obtain the cash it needs to pay it's short-term debt obligations as they come do

Small business development centers (SBDCs)

Local offices that provide comprehensive management assistance to current and prospective small business owners.

C corporation

The most common type of corporation, which is legal business entity that offers Limited liability to all of its owners, who are called stockholders.

Limitations of statutory close (or closed) corporations

The number of stockholders is limited. (The number varies among states but is usually no more than 50.) Stockholders normally can't sell their shares to the public without first offering the shares to existing owners. Not all states allow formation of this type of corporation.

Risk return trade-off

The observation that financial opportunities that offer high rates of return are generally riskier than opportunities that offer lower rates of return

Implicit cost

The opportunity cost that arises when A firm uses owner supplied resources

Limited liability

When owners are not personally liable for claims against their firm. Liability may lose their investment in the company, but there are other personal assets are protected.

sole proprietorship

a form of business ownership with a single owner who usually actively manages the company

partnership

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

Accounting equation

Assets = liabilities + owners equity

Assets

Resources owned by a firm

Expenses

Resources that are used up as a result of business operations

Business format franchise

A broad franchise agreement in which the franchisee pays for the right to use the name, trademark, and business in production methods of the franchisor.

Vertical merger

A combination of firms at different stages in the production of a good or service

Conglomerate merger

A combination of two firms are in unrelated industries

Horizontal merger

A combination of two firms that are in the same industry

Acquisition

A corporate restructuring in which one from buys another.

Merger

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

Nonprofit corporation

A corporation that does not seek to earn a profit and differs in several fundamental respects from C corporations.

Statutory close (or closed) corporation

A corporation with a limited number of owners that operates under similar, less formal rules and a C corporation.

Out of pocket cost

A cost that involves the payment of money or other resources

External locus of control

A deep-seated sense that forces others than the individual are responsible for what happens in his or her life

Internal locus of control

A deep-seated sense that the individual is personally responsible for what happens in his or her life.

Accounting

A system for recognizing, organizing, analyzing, and reporting information about the financial transactions that affect an organization.

Actively-based costing (ABC)

A technique to assign product costs based on links between activities that drive costs and the production of specific products

Distributorship

A type of franchising arrangement in which the franchisor makes a product and licenses the franchisee to sell it

Advantages of general partnerships

Ability to pool financial resources, ability to share responsibilities and capitalize on complementary skills, ease of formation, possible tax advantages.

Small business administration (SBA)

An agency of the federal government designed to maintain and strengthen the nations economy by aiding, counseling, assisting, and protecting the interests of small businesses.

Institutional investor

An organization that pools contributions from investors, clients, or depositors and uses these funds to buy stocks and other securities.

SCORE (Service Corps Of Retired Executives)

An organization that provides free, comprehensive business counseling for small business owners from qualified volunteers.

Stockholder

An owner of the corporation

Horizontal analysis

Analysis of financial statements that compares account value is reported on the statements over two or more years to identify changes and trends

Liquid asset

And I say that can quickly be converted into cash with little risk of loss

Revenue

Increases in a firms assets that result from the sale of goods, provision of services, or other activities intended to earned income

Angel investors

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

Advantages of statutory close (or closed) corporation

It can operate under simpler arrangements than conventional corporations. For example, it doesn't have to elect a board of directors or hold an annual stockholders meeting. All owners can actively participate in management while still having limited liability.

Limitations of S corporations

It can't have no more than 100 stockholders. With only rare exceptions, each stockholder must be a US citizen or permanent resident of the United States.

Disadvantages of nonprofit corporations

It has members (who may pay dues) but cannot have stockholders. It cannot distribute dividends to members. It cannot contribute funds to a political campaign. It must keep accurate records and file paperwork to document tax exempt status

Advantages of franchising

Less risk, training and support, brand recognition, easier access to funding.

Disadvantages of sole proprietorships

Limited financial resources, unlimited liability, limited ability to attract and maintain talented employees, heavy workload and responsibilities, lack of permanence.

Advantages of C corporations

Limited liability, permanence, ease of transfer of ownership, ability to raise a large amounts of financial capital, ability to make use of specialized management.

Advantages of LLCs

Limited liability, tax pass-through, simplicity and flexibility and management in operation, flexible ownership.

Entrepreneurs

People who risk their time, money, and other resources to start and manage a business

Leverage ratios

Ratios that measure the extent to which a firm relies on debt financing and it's capital structure

Profitability ratios

Ratios that measure the rate of return a firm is earning on various measures of investment

Advantages of S corporations

The IRS does not tax earnings of S corporations separately. Earnings pass through the company and are taxed only as income to stockholders, thus avoiding the problem of double taxation associated with C corporations. Stock holders have a limited liability.

Corporate bylaws

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

Financial accounting

The branch of accounting that prepares financial statements for use by owners, creditors, suppliers, and other external stakeholders

Managerial accounting

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

Franchisor

The business entity in a franchise relationship that allows others to operate its business using resources it supplies in exchange for money and other considerations

Owners equity

The claims a firm's owners have against their company's assets

Franchise agreement

The contractual agreement between the franchisor and a franchisee that spells out the duties and responsibilities of both parties.

Risk

The degree of uncertainty regarding the outcome of the decision

Net income

The difference between the revenue a firm earns and expenses it incurs in a given time period.

Articles of incorporation

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

Statement of cash flow's

The financial statement that identifies a firm source and uses the cash in a given accounting prriod

Income statement

The financial statement that reports the revenues, expenses, and net income that resulted from a firms operations over an accounting.

Finance

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

Financial capital

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

Board of directors

The individuals who are elected by stockholders of the corporation to represent their interests

Accrual-basis accounting

The method of accounting that recognizes revenue when it is earned and match expenses to the revenues they helped produce

Franchisee

The party and a franchise relationship that pays for the right to use resources supplied by the franchisor

Financial accounting standards Board (FASB)

The private for that establishes the generally accepted accounting principles used in the practice of financial accounting

Divestiture

The transfer of total or partial ownership of some of the firms operations to investors or another company

Financial leverage

The use of debt in a firms capital structure

Cost

The value of what is given up in exchange for something

Alternative lenders

Typically private firms that charge very high interest rates, structure loans to be repaid in months rather than years, and often collect payments daily or weekly to reduce risk. They also tend to make decisions quickly and are more willing to overlook lower credit scores

Disadvantages of general partnerships

Unlimited liability, potential for disagreements, lack of continuity, difficulty and withdrawing from a partnership.