GB 112 Final

List and explain the objectives of a business

o Profitability- to make a profit

o Services to the community

o Provide goods

o Social responsibility- overall way business attempts to balance commitments to stakeholders/ people

o Ethical behavior- based on what's right and what's wrong

List and explain the major functional areas of a business

Business development/R&D

Legal Advice

Sales and Marketing

Operations Management

Accounting

Finance

Information Technology

Human Resources

Explain the major functional areas of a business: Business development/R&D

to identify opportunities, build the company’s expertise and find business partners.

Explain the major functional areas of a business: Legal Advice

on setting up, learning how to write contracts, dealing with regulations and compliance.

Explain the major functional areas of a business: Sales and Marketing

to get their services out there to customers interested in hiring them. Including web design.

Explain the major functional areas of a business: Operations Management

o to keep the company’s processes efficient and effective

Accounting- to keep track of their income, expenditures, money due from customers, and taxes.

Explain the major functional areas of a business: Finance

to raise money, create and track a budget, and plan expansion.

Explain the major functional areas of a business: Information Technology

to make sure their networks and other technology tools were safe and operating at all times.

Explain the major functional areas of a business: Human Resources

o for hiring, benefits and other employee issues.

· Understand the term “stakeholder” and be able to list the major stakeholders of a business

o Stakeholder- a person, group, organization, or system who affects or can be affected by an organization’s actions

§ Employees

§ Managers

§ Owners

§ Suppliers

§ Society

§ Government

§ Creditors

§ Shareholders

§ Customers

Identify the different types of business organizations

o Sole Proprietorship

o General Partnership

o Limited Liability Partnership

o Limited Liability Corporation- LLC

o S Corp

o Publicly Held Corporation

Sole Proprietorship: definition

- One Person owns and operates

- This is the worst one

· No Protection

· No tax breaks

Sole Proprietorship: Advantages and disadvantages

- Advantages

· Independent

o Control

o Decision-making

· Simplicity of start-up

- Disadvantages

· Unlimited liability

· Lack of continuity

· Limited capital

· Need collateral for loan

General Partnership: Define

§ Owned by two or more partners

General Partnership: Advantages and disadvantages

§ Advantages

· Easier to borrow because business not dependent on one person

§ Disadvantages

· Unlimited liability

· Lack of continuity

· Limited Capital

· Need collateral for loan

Limited Liability Partnership: Define

§ Hybrid form

§ Designed mostly for professionals who normally do business as a partnership

· Doctors à because the high level of potential lawsuits

· Accounting firms à have too much knowledge

· Lawyer

§ High Risk/ high lawsuit

Limited Liability Partnership: Advantages and disadvantages

§ Advantages

· Partner liability limited to

o Extent of own wrongful act

o Supervision of party who committed the wrongful act

· Taxation

§ Disadvantages

· LLP statues vary state by state

Limited Liability Corporation- LLC: Define

§ Hybrid form

· Limited liability of corporation

· Tax advantages of partnership

§ This is the one you want!

Limited Liability Corporation- LLC: Advantages and disadvantages

§ Advantages

· Liability limited to amount of your investment

· Flexibility to be taxed as partnership or corp

§ Disadvantages

· State LLC states are not uniform (hard to open in many states)

· Lack of case law due to newness of org form

S Corp: Define

§ Corporation rules

· In organization

· In operation

§ Taxed as a partnership

§ Not popular

S Corp: Advantages and disadvantages

§ Advantages

· Limited Liability

· Taxation

§ Disadvantages

· Limited capital

· Limited # of owners

· Less flexible to form & operate than LLP or LLC

Publicly Held Corporation: Define

§ Business owned by stockholders

Publicly Held Corporation: Advantages and disadvantages

§ Advantages

· Limited liability

· Ease of continuity

§ Disadvantages

· Double taxation

· High start-up costs

· Complex regs and legal requirements

· Can be taken over against will of its managers

· Owners dont have control

Explain why companies need money

o Starting a business- start-up costs, keep business afloat while it is growing

o To sustain entrepreneurs

Salaries
Benefits

o Resources

Computers and software
Office space
Furniture
Phone systems
Travel
Insurance
Consultants
Other experts/networking contact

Equity: Pros and cons

§ Pros

· Get money needed

· Get expertise

§ Cons

· Must give up a lot of control by selling the shares to other investors

- Investors have input on how management, employees, compensation, and products/services

Types of equity:

oPrivate Equity

- Angel investors

- Venture capitalists

- C Corporations

- Financial Institutions

oPublic Equity: must disclose info with public

- Shares must meet governmental standards (SEC)

- Each stock is assigned a ticker symbol

Debt: Pros and Cons

§ Pros

· Doesnt give up control

· Interest paid on loans reduces taxable income

- steady stream of cash

§ Cons

- Due Date

- Interest

- If the company misses a payment it can be forced to file for bankruptcy

- high risk

- restrictions

Types of Debt

§ Private

- Bank loans

- Small Business Administration Loans (SBA)

§ Public

- Corporate Bonds

o notes

o debentures

o mortgage bonds

o asset- backed bonds

Types of Equity Financing: Private Equity Financing

- Private equity refers to owning a part of the business

- legally no one but the owners have access to any info about the company, except IRS & state departments

- Entrepreneurs invest in company to show they believe in it

- family/friends

Types of Equity Financing: Angel investors

o Sophisticated investors

o Not regulated by SEC

o Private individuals/ clubs of individuals who have funds & want to invest in & help start-ups

o Have expertise & want to use it to help company

o Wealthy & can afford to lose investments

Types of Equity Financing: Venture Capitalists (VCs)

- Generally limited liability corporations (LLC) or some type of business entity that has no personal legal liability

- It is a way for investors to diversify, but in high risk investments

- The generally require control of the company through stock

Types of Equity Financing: Institutional Investors

such as pension funds may invest directly in a start-up or as a limited partner in a venture capitalist firm

Types of Equity Financing: Corporations

§ may purchase equity in a start-up company, in order to receive:

o Returns

o Status as a strategic partner- a large company may buy/invest in a smaller one because it may be cheaper to buy than develop new products/services

Types of Equity Financing: Sale of stock to outsiders

Sell stock

preferred vs. common stock

Common stock

residual owners
get $ last if co has financial problems
voting rights

elect board of directors
make major decisions

no obligation for co to pay you dividends

Preferred stock

No voting rights
Dividends promised
If bankruptcy, they get $ 1st

Private sources of debt and equity

- Don't have to go through SEC

- Private Equity

- Angels. VCs, etc.

- Private Debt

- bank loans

- lines of credit

- asset backed loans

- customized loans

Public sources of debt and equity

- Asset backed bonds

- Mortgage bond

- Notes

- Debentures

- Public equity

- Preferred stock

- Common stock

- Public Debt

- Corporate bonds

Explain the terms IPO and SEO

IPO= initial public offering

First time company sells stock to public

SEO= seasoned Equity offering

Any future sale of stock

Before selling stock in IPO or SEO

Must meet SEC requirements

Registration form

Explain the difference between primary and secondary markets

Primary Market

Only time $ goes to company

After this... Secondary Market

$ goes from buyer of stock to seller of stock
Nothing goes to the company

Understand the role of the SEC in overseeing securities and the role of rating agencies.

- Legal

- Requires registration for IPO

- Regulates sale of security, financial reporting, disclosure of info, compliance with Sarbanes-Oaxley, & auditors

- Gives a qualification to co. to see how it is doing and if the bonds are going to get paid

Understand the relationship between risk and return

- the higher the risk the higher the return

- AAA. AA. A. BBB --> safe

- BB, B, CCC, CC --> junk bonds, riskier, more return

- Treasury security is risk free because there is a zero chance of default.

Understand the Importance of TVM and time lines

$1 is worth more today than $1 next year
Why?

Can invest the dollar today
Eg. At 5%
In one year $1 will grow to $1.05

Define and compute using financial calculator

FV of lump sum
FV of an annuity
PV of lump sum
PV of an annuity
Payment
Rate
Number of Periods

Calculations

Compute the value of a bond with semi-annual interest payments
Compute the value of a zero-coupon bond
Compute yield to maturity

four primary reasons that businesses fail

1. Managerial incompetence or inexperience

2. Neglect (not give all of their time to the business)

3. Week control systems

4. Insufficient capital

Discuss the importance of cash flows and cash flows forecasting

Important for businesses to prepare a business plan and then prepare a cash flow forecast based on that business play why:
§ To see that the business plan will actually make money
§ To plan on capital requirements so co. does not run out of cash

primary reasons for new business success

1. Hard work, drive, and dedication

2. Market demand for the products or services being provided

3. Managerial competence

4. Luck

Accounting Equation

- Assets= Liabilities + Owners' Equity

- ALOE: A= L + OE

- Balance Sheet

the four basic financial statements.

- Income Statement

- Statement of Retained earnings

- Balance Sheet

- Statement of cash flows

- reports net income for a period of time

- RENI: Revenue - Expenses = Net Income

- Snapshot of company's financial position

- A=L + OE

§ Cash inflows (receipts) & outflows (payments) come from three primary activities

· Operating activities

· Investing activities

· Financing activities

financial statement elements.

- Assets

- Liabilities

- Owners’ Equity

- Revenues

- Expenses

Assets

- Economic resource the expects future economic benefits

- Owned/ controlled by business

- As a result of past transactions

- ex.

- Cash

- A/R

- Inventory

- Prepaid Expenses

- Plant

- Equipment

- Land

- Building

Liabilities

§ Probable debts or obligations of the business

§ From past transactions

§ That will be paid with assets or services in the future

§ Examples

· Accounts Payable

· Notes Payable

· Unearned Revenue

· Accruals

Owners’ Equity

- The stockholders’ ownership interest in the assets of a corporation.

- Stockholder claim on company

- Asset - Liabilities

- Whats left after debts are paid

- Stockholders'/ shareholders' equity

- Paid- in capital

- retained earnings

Revenue

§ Earned by delivering goods or services

Increase in retained earnings from delivering goods or services to customers or clients.

Expenses

§ Costs of doing business

§ Rent, utilities, insurance

Decrease in retained earnings that results from operations; the cost of doing business; opposite of revenues.

- Net income ( from income statement) flows to statement of retained earnings

- ending retained earnings flow to balance sheet

- Cash balance from balance sheet flows to statement of cash flows

Cash Accounting vs. Accrual accounting

Accrual accounting is more of an economic idea instead of cash accounting which is only what comes in and out of the cash T-Account

Cash Accounting

- Records only cash transactions

- Cash receipts are treated as revenues

- Cash payments are treated as expenses

Accrual Accounting

- follows GAAP

- Records the impact of a business transaction when it occurs even if no cash is received or paid

Revenue is recorded when earned

- Expenses are recorded when incurred

relevant vs reliable

Relevant – capable of making a difference in decisions (predictive value, feedback value, timely)

Reliable – free from significant error, has validity, can be relied on (verifiable, represents reality, unbiased)

concepts

Entity concept
Going-concern concept
Stable-monetary-unit concept
Time-period concept
Conservatism concept
Materiality Concept

Entity concept

Accounting draws a boundary around each organization to be accounted for. Separate business activities from owners’ activities

Going-concern concept

Accountants assume the business will continue operating for the foreseeable future.

Stable-monetary-unit concept

Accounting information is expressed primarily in monetary terms that ignore the effects of inflation.

Time-period concept

Ensures that accounting information is reported at regular intervals.

Conservatism concept

Accountants report items in the financial statements in a way that avoids overstating assets, owners’ equity, and revenues and avoids understating liabilities and expenses.

Materiality Concept

Accountants perform proper accounting for items that are significant to the company’s financial statements. This does not mean a transaction can be ignored, but that a company does not have to follow strict GAAP if the effect is immaterial.

Principles

Reliability (objective) principle
Cost principle
Revenue Recognition principle
Matching principle
Consistency principle
Disclosure principle

Reliability (objective) principle

Accounting records and statements are based on the most reliable data available.

Cost principle

Assets and services, revenues and expenses are recorded at their actual historical cost.

Revenue Recognition principle

- Tells accountants when to record revenue (after it has been earned) & the amount to record (the cash value of what has been received)

- 4 criteria

- provide goods/services

- agreement for customers to pay

- amount is known

- it is likely they will pay

Matching principle

Directs accountants to (1) identify and measure all expenses incurred during the period and (2) match the expenses against the revenues earned during the period. The goal is to measure net income.

Consistency principle

Businesses should use the same accounting methods from period to period.

Disclosure principle

A company’s financial statements should report enough information for outsiders to make informed decisions about the company.

Define and explain the acronym IFRS

§ International Financial Reporting Standards

§ As indicated within the title, theses standards are aimed at a global practice

§ Ultimately the goal is to achieve a single set of high-quality common accounting standards used around the world

Is IFRS different than US GAAP?

§ As a general rule IFRS standards are more broad and principles based with limited interpretive guidance

§ US GAAP is more specific and rules based with far more “bright lines” comprehensive implementation guidance and industry interpretations

IFRS VS GAAP BOARDS

§ GAAP is monitored by the Financial accounting standards board (FASB)

§ IFRS is formulated by the International Accounting Standards Board (IASB)

IFRS roadmap

§ The Roadmap sets forth several milestones and if achieved, they could result in mandatory use of IFRS in financial statements filed with the SEC by US issuers beginning in 2014, with early adoption permitted

List the objectives and components of a system of internal control

- Safegaurd assets

- Encourage employees to follow company policy

- Promote operational efficiency

- Ensure accurate, reliable accounting records

- Comply with all legal requirements

Explain the objectives and components of a system of internal control: Safegaurd assets

a company must safeguard its current assets (i.e. cash)

Explain the objectives and components of a system of internal control: Encourage employees to follow company policy

everyone within a company needs to work towards the same goal; company must treat managers and employees fairly

Explain the objectives and components of a system of internal control: Promote operational efficiency

you can not afford to waste any resources; eliminate waste and increase profits

Explain the objectives and components of a system of internal control: Ensure accurate, reliable accounting records

keep reliable records to ensure you are receiving everything you buy and the money for the products you sell

Explain the objectives and components of a system of internal control: Comply with all legal requirements

a company is its own entity and must follow federal law

Components of internal control

- Control Environment

- Risk Assessment

- Control Procedures

- Monitoring of Controls

- Information System

Components of internal control: Control Environment

owners and management must set good examples for the company employees; owner must show importance of internal control

Components of internal control: Risk Assessment

a company must identify its risks (examples: Kraft Food could cause food poisoning)

Components of internal control: Control Procedures

procedures designed to ensure that the business’s goals are achieved

Components of internal control: Monitoring of Controls

- Companies hire auditors to monitor controls; internal auditors safeguard company assets, external auditors ensure accounting records are accurate

Components of internal control: Information System

- the owners and management need accurate information to keep track of profits and losses

o Controls related to objectives (internal controls)

§ Authorization procedures

§ Documents

§ Segregation of duties

§ Access controls

§ Physical controls --> locks/ passwords

§ Independent verification --> check people’s work

AIS

o An accounting information system (AIS) is a special purpose information system (a subsystem of the MIS) that collects and processes data about economic events, and reports information related to financial transactions.

explain the difference between data and information

- Information is different from data. Information implies “usefulness” in decision-making. Data are the facts. They are the “pieces of information” that on their own do not have meaning

- Data + Data + Data = Info

· Understand the concept of accrual accounting, including the matching and revenue recognition principles

- time period concept ... AC info must be reported at regular intervals

- Rev Rec Principle ... Record revenue when earned and 4 criteria

- Matching principle ... record expenses during the period they are incurred to generate revenue

· Understand why we need adjusting entries

o Adjusting entries are needed because the financial statements have to be updated since some expenses have not been reflected yet (ex. prepaid things)

o Accrual basis accounting requires that we follow the Revenue Principle and Matching Principle

GB 112 Final

General Business Administration 112 with O'leary at Bentley College

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