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.