Exam 3 study guide intro to business
Terms in this set (62)
List and briefly explain the two main ways that money has value
1) exchange value: it is a convenient way to buy and sell things
2) storage value: it is a way of storing wealth
What is meant by the time value of money
The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity
List and briefly explain the two things you can do with money to keep it from sitting empty
1) you can rent it out: you would loan it out, buy bonds, put it into an interest bearing deposit account. you still own it but your letting others use it and you get paid to do so. there is a contract saying how long they have to use the money before they have to give it back
2) You can sell it: you give it to someone else for part ownership in their business (equity). you no longer own the money but when the business makes money part of the profits are yours. counting on stream of money to be more than the amount you gave away and you can get money back by selling ownership to others
List and briefly explain the two important factors to consider when deciding how to make money on our money
1) need for liquidity: How quickly you can convert whatever you have back into cash and a liquid asset is an asset that can be quickly turned into cash. Financial markets increase the liquidity of equities
2) Tolerance for risk:
Return: how much money you get back in return for letting someone else use your money
Risk/return tradeoff: You will need higher expectations of returns to take on greater risks (safety tends to return less money while risks tend to return more money)
List the three reasons a business may need money from finley
1) start new ventures
2) fund growth
3) manage cash flow
List and briefly explain the two ways to get access to someone else's money that is in storage
1) you can rent it (debt financing)
2) you can give them part of your business for the money (equity financing)
What were the four important considerations presented in class on how to best get access to "other people's money" (OPM)
1) will someone be willing to give you the money you need and under what terms
2) how much will it cost you to use
3) How much will they control you
4) How much can you borrow before risking being over-leveraged
In finance, what does "leverage" mean?
to use debt financing (as opposed to equity financing)
Borrowing money to acquire assets works if two things happen. what are those two things?
1) The asset appreciates (increase) in value
2) The income produced from the asset covers the interest and debt repayment obligation
List and briefly explain the two things that can make being leveraged become risky
1) the interest and debt repayment obligation is greater than the income earned bu the asset
2) the asset depreciates (decreases) in value faster than the debt is repaid
What is the most basic measure of how well an investment is doing? Explain what this measure is and how it is calculated. What is the relationship between this measure and the risk/return trade-off?
1)The most basic measure of how well an investment is doing is called the Return on investment (ROI)
2) ROI refers to the amount of money you make (return) on an investment as a percentage of the money you have invested
2.5) Return on investment = (Net profit/Total investment) x 100
investors expect a higher ROI for riskier investments
List and briefly explain the two purposes of ratio analysis
1) to see if a company is healthy
2) to see how well a company is performing
List and briefly explain the four specific types of assets that financial securities can represent
1) stocks: ownership positions of a company
2) bonds: "loanership" positions in various types of institutions
3) options: promised positions to buy stocks and/or bonds
4) mutual funds: shared ownership in stocks and/or bonds
List the three reasons why markets are crucial to our economy
1) Businesses need access to money to get started, grow, and manage their cash flow
2) People who have money prefer assets that are liquid
3) Financial markets allow ownership and loanership positions to be liquid
Explain what a share of a stock represents. Give an example. What happens when you buy and sell shares of a stock
1) A share represents your share of the ownership of the company
2) if a company has 100 shares and you own 1 of them then your share of the company is 1%
3) when you buy a share of a stock, you are buying part of the company
4) When you sell a share of stock, you are selling part of the company
List and briefly explain the two main types of stocks
1) common stock (most common type of stocks):
A) receives a share of the profits through dividends B) the dividends are not guaranteed but are determined by other obligations for the firms resources and the need of the firm to retain cash for other purposes
C) holders of common stock have a say in how the company is run: they vote on the board of directors who oversees the operations of the company and the weight of their vote is determined by how many shares of common stock they own
2) Preferred stock: receives a guaranteed dividend in perpetuity
A) preferred stock has a "preferred" position to common stock in two ways: their dividens must be paid before common stock holders can receive a dividend and if the company goes out of business, they will recive their invested money back before the common stock holders get theirs (also usually doesnt come with voting rights
Stocks tend to be the most liquid of all securities. explain why.
Stocks for a given company are completely "fungible"
A) one share of apple common stock is the exact same as all other shares of apple common stock
B) Thus all shares of common stock for a given company are completely interchangeable
List and briefly explain the two ways stocks are exchanged.
1) stock exchange: A) stocks of larger, more established companies trade through centralized trading locations B) stock prices are made available moment by moment
2) Over-the-counter: A) smaller, less establish companies are traded through a decentralized network of dealerships B) prices are only made public after the exchange has been finalized
Briefly explain why there is not a centralized bond exchange. how are bonds traded?
1) Bonds are less fungible than stocks and thus there is not a centralized bond exchange
2) Bonds are traded through a network of dealers
List and briefly explain the two factors that determine the price of a bond
1) current interest rates (affects the whole bond market): average interest rates across the economy go up and down, when interest rates go up, bond prices go down, and when interest rates go down, bond prices go up
2) Financial position of the entity owing the money (affects individual bonds): entities are rated on their ability to repay their debt, as these ratings go up their bond prices go up and when the ratings go down there bond prices go down
What are options? What are the two types of options and what do they give us the option to do? who should engage in options trading and what kind of money should be invested in options trading?
1) options give someone the right but not the obligation to buy or sell a stock for a particular price at some specified date in the future
2) The two types of options: A) calls: the option to bu and B) put: the option to sell
3) Dealing with options is extremely complicated and risky: only sophisticated investors should invest into options and only with money that can be risked
What are mutual funds and how do they operate?
1) Mutual funds are where a group of people pool their money and buy a portfolio of stocks
2) How mutual funds operate are A) they are developed by financial companies and B) they are managed by professional fund managers
What are the three advantages of mutual funds?
1) An informed professional is making the buying and selling decisions
2) Your risk is diversified across a broad portfolio of stocks
3) There are an abundant of mutual funds so you can find one that meets your ivestment
What are the three disadvantages of mutual funds?
1) You cannot buy and sell individual stocks when it is to your tax advantage to do so
2) Larger mutual funds have a harder time moving in and out of the market than do individual investors
3) There are management fees associated with the funds
What are the two reasons why proper oversight in needed in financial markets?
1) For people to continue investing in the financial markets, trust needs to be high
2) With so much money floating around in the financial markets, the potential for fraud is high
What is the U.S. governmental body that oversees financial securities and the financial markets?
The securities and exchange commission (SEC)
List the three groups discussed in class who need accounting.
1) Owners/ Investors
2) Managers/ Marketers
3) Government agencies
List and briefly explain the three main areas of accounting.
1) Financial accounting: assessing the company's performance and position for owners, investors, and creditors
2) Managerial accounting: assessing the company's operations in order to make strategic and operational decisions
3) Tax accounting: Assessing how much money will be owed to the government
List and briefly explain the two things ting is trying to discover through financial accounting
1) Following the movement of the money: Where is the money coming from and where is it going?
2) Assessing the worth of the company: What does the company own and what does it owe
List and briefly explain the three components to the simplified model of normal business operatins
1) Revenue: money that comes in from customers
2) Expenses: money that goes out to run the business
3) Net Income: revenue minus expenses
What is the simplified income statement?
Revenue - Expenses = Net income
List and briefly explain the two complications to the simplified model of normal business operations presented in class.
1) Time period matching: When do you count something as revenue or expenses
2) Value changing: How do you account for something gaining or losing value in the normal business operations
List and briefly explain the three components to the simplified model of a company's worth.
1) assets: Resources owned by a firm
2) Liabilities: claims that outsiders have on a firm
3) Owner's equity: how much has been invested or reinvested into the firm
What is the simplified balance sheet?
Assets = Liabilities - Owner's Equity
The actual worth of the company is simply what someone is willing to pay to buy it. Explain why this may be different from owner's equity on the balance sheet.
1) owner;s equity on the books can be quite different from total market capitalization
2) The balance sheet doesn't directly reflect brand equity
What were the two additional financial statements presented in class?
1) Cash flow statement: reflects the increase or decrease in cash ( and cash equivalents) over the accounting period
2) Pro forma statements: gives a different perspective on the traditional financial statements
What is the goal of managerial accounting?
The goal is to help the company become more profitable
List and briefly explain the three characteristics of managerial accounting presented in class?
1) Internal purpose: It is more for the people inside the company than those outside
2) Flexible: its rules are more flexible than the rules of financial accounting
3) Cost focused: much of managerial accounting is deciding how much something costs
Assigning costs can be complicated. List and briefly explain the three ways of looking at costs which were presented in class.
1) based on whether they actually occurred: Out of pocket costs and opportunity costs
2) Based on whether they vary with production: Fixed and variable costs
3) Based on whether they can be tied to a specific objective: direct and indirect costs
List and briefly explain the four reasons to study economics which were presented in class
1) is answers the "why" question
2) It helps avoid "unintended consequences"
3) it sharpens analytic skills
4) it provides a useful way of thinking
Economics is studied at two levels. list and briefly explain the two branches of economics. Your answer should include the types of questions that are addressed in each
1) Macroeconomics: studying economics at a society-wide level:
A) what makes economies expand and flourish?
B) What makes economies experience recessions or depressions?
C) What causes fluctuations in prices, interest rates, employment levels
2) Microeconomics: studying economics at the industry, company, or consumer level:
A) How are prices of specific products set
B) What determines the flow of resources in an out of industries?
C) What determines how companies and consumers make economic decisions?
List and briefly explain the four indicators of macroeconomic performance which were presented in class
1) Gross Domestic Product (GDP)
3) Business cycle
4) Price levels
List and briefly explain the three major schools of thought in macroeconomics
1) Classical ("laissez faire") economics
2) Keynesian economics: Two approaches to managing an economy
3) Managed economics
What do you need to know to pass micro-economics?
How to read a graph
What is the core concpet in micro-economics? Explain this concept
Supply and demand
List and briefly explain the four levels of economic competition
1) Pure competition
2) Monopolistic competition
List and briefly explain the lure for Mark, Mandy, Ting, and Finley of doing business globally
1) Mark sees huge markets: 7 billion world pop vs 320 million U.S. pop and 80 trillion GWP vs 18 trillion GDP
2) Mandy sees supply-chain advantages: Diversity of suppliers and products supplied and facilties can be placed in the most politicaly friendly areas
3) Ting sees huge cost savings: production costs are much less for products that are labor intensive and dont require a highly skilled workforce. Inventories can be stocked with globally lowest cost alternative
4) Finley sees broader investment opportunities: access to a much broader capital base with more opporunities for investment. Along with diversification of investments
List and briefly explain the three challenges of doing business globally where were presented in class
1) Sociocultural differences: A) language barriers B) social customs C) hostility towards outsiders
2) Economic differences: A) levels of economic development B) distribution challenges C) currency exchange issues
3) Political and legal differences: A) how developed is their legal system B) What trade barries exist?
List and briefly explain the five ways to get involved in global business which were presented in class
1) Exporting: producing products locally and selling them in other countries
2) outsourcing and importing: A) setting up production facilities in other countries B) setting up contract manufacturing agreements in other countries C) purchasing products manufactured in other countries
3) Licensing and franchising: selling the rights to manufacture and/or sell products in other countries
4) joint ventures: partnering with companies in other countries to manufacture and/or distribute products
5) foreign direct investments: developing whole business units in other countries
List and briefly explain the three trade restrictions on global free trade which were discussed in class
1) Tariffs: a tax or duty on goods imported into a country
2) Quotas: a limit on the amount of a good that can be imported
3) Embargo: a ban on trade with a particular country
Global free trade is regulated by two things. list and briefly explain each
1) General agreement trade and tariffs (GATT): A set of guidelines regulating world trade
2) World trade organization (WTO): An intergovernmental organization that addresses world trade issues within the framework of GATT
What were the two trade blocks mentioned in class?
1) North American Free Trade Agreement (NAFTA)
2) European Union (EU)
Explain the nature of purpose of ehtics
1) Ethics: the study of morality, what is good or bad
2) The purpose of studying ethics is to come up with normative standards which prescribe what people should or should not do
What were the two motivations for business ethics presented in class
1) Because it is profitable
2) Because it is right
List and briefly explain the four possible bases for ethical decision making
1) Law of the jungle: ignoring right and wrong and simply focusing on personal gain through power and cunning. power: might makes right and cunning: outwitting others for selfish gain
2) Emotion: What feels right or wrong determines what is right or wrong
3) Social Contract: I will not do that which causes you harm and in return you will not do that which causes me harm
4) Authority: making ethical decisions based on a higher authority (god, holy writings, or a person)
Any groups that have a stake (personal interest) in the performance and actions of an organization
List four business stakeholders and their stakeholder interests in business
1) employees: they want a safe work environment, reward commensurate to their contribution, and to be treated with respect
2) Consumers: want safe products, products that do what they are supposed to do, and have accurate information
3) Investors: want responsible stewardship and full and accurate disclosure of relevant information
4) community: wants to avoid harming the environment and support of the philanthropic efforts of the community
List and briefly explain the three considerations in deciding on the best legal form for your business which were presented in class
1) Taxation: Double taxation with one tax on the corporations profits and the other tax on the dividends that the owners will get
2) Owners liability: Two types of liability: A) Full liability where the owner is personally liable for the debts of the company and B) Limited liabilty: the owners are shielded from the liabilities of the company (can still be liable if they engaged in fraud or negligent and dont persoanlly secured the debt
3) Transfer of ownership: some business forms make it easy for a person to buy part of a company from one of the current owners while some make it more difficult. Some forms make it so easy that ownership becomes a liquid asset
List and briefly explain the four major legal forms of a business which were presented in class
1) Sole proprietorship: One person owns the company, the company is simply seen as an extension of the individual ( profits are taxed as ordinary income and the individual is personally liable for all company debts), and they are easy to establish
2) General partnership: business is owned by two or more people, profits are taxed as ordinary income, and all partners are personally liable for the company debt
3) C Corporation: The business is an entity separate form the owners, owners are not liable for company debt, The corporation is taxed as a separate entity, and all profits are paid out to the owners (dividends are taxed at capital gains rate)
4) Limited Liability Company (LLC): The income from an LLC is taxed as ordinary income, The partners of the LLC are not personally liable for the debts of the LLC, and the nature of LLC's differ form state to state
List and briefly explain the two motivations for owning your own business
1) Entrepreneurship: Some people are driven by the challenges and risks of starting something new "entrepreneurs". Entrepreneurship means starting a business and can be a motivation on its own. Some entrepreneurs have build huge companies.
2) Working for yourself: Most people would rather work for themselves than somebody else and that is the driving force behind most small business ownership. Most small business owners are satisfied once the business is up and going and arent driven to start other new ventures thus not all small business owners wouldnt be considered entrepreneurs.
List and briefly explain the four things you need to do to start a business
1) Figure out how you will get customers (MARK): your not in business until you have business. select your target market and make sure you have a way to reach them through promotion and distribution and that you have a competitive advantage within the target market.
2) Make sure you deliver on your promises (MANDY): Marketplace is brutal on companies that dont deliever on promises. Make sure that you can produce the quality of product or service for customers at a price they are willling to pay.
3) Make sure you have the funds you need to get the company going (Finely): It takes money to make money. Most of the time you have to start small and self-fund the operations. Start saving so that you can own your own business one day
4) Dream big while facing reality: keep your eyes on the money (TING) A) making money is like building in the sand with a toothpick and losing money is like pouring money on the sand. B) Work with rather than against the laws of economics (ECO): ignorance is a disaster with business. People who know how to work the laws of ecnomics thrive while the people who ignore the laws economics die.
List and briefly explain the three marching orders that were given at the very end of the last lecture
1) Take your next step in your business education seriously: Your next big step is to learn accounting and economics, these will help you face realities of the business world regardless of what your major is
2) Make sure you get an education and not just a degree: Employers will quickly figure out whether or not you have the skills they hired you for. If you dont develop the skills they want you will lose your job and be in a difficult spot to develop these skills later in life
3) Always be a student of success: Remember, success is one door with two locks. Learn form others. Life is too short to learn it all from scratch. Improve yourself daily through reading, that way you easily acquire what others have struggled hard to obtain
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