Chapter 4
Name five advantages of a sole proprietorship.
1. Sole proprietorships are easy and inexpensive to form.
2. Sole proprietors do not have to discuss their operating plans with anyone.
3. All profits from a sole proprietorship belong to the owner.
4. A sole proprietor has direct control of the sole proprietorship and can make decisions without anyone else’s approval.
5. Sole proprietorships have the most freedom from government regulations
Why are small businesses so important to the U.S. economy?
More than 99 percent of all U.S. firms are classified as small businesses. Small businesses are fueling job creation and innovation.
Why are accountants so important to a corporation? What function do they perform?
Accountants are important because they analyze and interpret financial information to determine if the organization is using its funds efficiently and to make plans for increasing profits.
Accountants develop systems that summarize all transactions into comprehensive financial statements.
What is Fiat Money?
paper money not readily convertible to precious metal such as gold.
How can a company finance fixed assets?
The organization can attract new owners (equity financing), and/or it can take on long-term liabilities (debt financing). Debt financing includes long-term bank loans and corporate bond issues.
List two different types of partnerships and describe each.
A general partnership is a complete sharing in the management of the business, and each partner has unlimited liability for the debts of the business.
A limited partnership has at least one general partner who assumes unlimited liability and at least one limited partner whose liability is limited to his or her initial investment. A limited partner does not participate in the management of the business.
Which fields tend to attract entrepreneurs the most? Why?
The fields of retailing, services, and high technology tend to attract small businesses because these fields (except for high technology) are relatively inexpensive to enter. They generally do not require a large initial investment or a lot of experience.
Discuss the external uses of financial statements.
The main external use is to report the financial performance of the business to outside organizations. This may include filing taxes, obtaining credit, and reporting results to shareholders and analysts.
What is, typically, the difference between a checking and savings account?
Checking: Can be withdrawn without advance notice.
Savings: Usually Cannot be withdrawn without advance notice.
Define working capital management.
Working capital management is the management of current assets and current liabilities. The term is used because the current accounts continually flow through the firm and are said to be working.
Differentiate among the different types of corporations. Can you supply an example of each type?
What are some advantages to starting a business?
Advantages of small business ownership include independence and flexibility in terms of the location and opening hours of the business.
Additional advantages include lower costs, flexibility to adapt to changing market conditions, focus on a limited market niche, and reputation
What is a budget?
A budget is an internal financial statement that projects revenues and expenditures for a given period of time. They may be applicable to an individual segment of the firm or the firm as a whole. Their major value is the analysis of inflows and outflows.
What is the definition of "Reserve Requirement?"
Percentage of deposits banking institutions must hold in reserve.
What are bonds and what do companies do with them?
A bond is a debt security that a company sells to raise long-term funds. The bond is a certificate, much like an IOU, that represents the company’s debt to the bondholder. Organizations issue bonds to finance long-term capital investment projects.
Which form of business organization has the least government regulation? Which has the most?
Sole proprietorships have the least government regulation.
Public corporations have the most regulation.
What are the principal reasons for the high failure rate among small businesses?
The main reasons for the high rate of failure among small businesses are undercapitalization, inability to cope with growth, poor business management, over optimism, burdens imposed by government regulation, insufficient reserves to withstand slow sales, and vulnerability to competition.
Discuss the internal uses of accounting statements.
Financial statements may be used internally for planning and directing the course of the organization. Monitoring cash flow is one important area. Financial statements are also important in the preparation of budgets for the firm.
Discuss the four economic goals the Federal Reserve must try to achieve with its monetary policy.
The Fed must promote stable, long-term economic growth; high levels of employment; stable prices; and a balance of international payments.
It does this by controlling the money supply, regulating financial institutions, managing regional and national check clearing procedures, and supervising federal deposit insurance of commercial banks belonging to the Federal Reserve System.
How can companies use equity to finance their operations and long-term growth?
Companies may sell partial ownership (equity) of the organization in the form of stocks to individuals wishing to invest. Each share represents a portion of the organization’s total equity. By expanding its equity base through stock issues, an organization is able to raise funds for long-term capital expenditures.
Compare the liability of the owners of partnerships, sole proprietorships, and corporations.
Sole proprietors have the greatest liability because, as sole owners, they have no one to share the burden with if they fail or are sued.
General partners also have great liability, but it is shared among all the general partners.
The liability of limited partners and corporate stockholders is limited to their initial investment.
What types of financing do small entrepreneurs typically use? What are some of the pros and cons of each?
Small-business owners can obtain financing from friends and family
Small businesses may seek financing from banks or other financial institutions. A bank may require collateral or a mortgage, and the bank can repossess the property if the business fails to repay the loan.
A financial institution may grant a line of credit, an agreement by which the financial institution promises to lend the business a predetermined sum of money on demand.
Other sources of financing include local and state agencies, the Small Business Administration, and venture capitalists.
Together, the income statement and balance sheet answer two basic questions. What are they?
The income statement answers the question of the firm’s profitability, and the balance sheet answers the question of how much the firm is currently worth.
What are the six characteristics of money?
What were some of the principle causes of the most recent recession?
There are a number of different causes for the most recent recession. One of the early causes was a housing bubble that began to burst in 2007 and into 2008. Subprime mortgages and dubious lending practices were largely blamed for that occurrence. Complicated financial tools like derivatives and unethical accounting practices allowed firms to take excessive risks and become over-leveraged with debt without investors noticing. While the recession was the worst since the Great Depression, many experts believe it could have been even worse if the federal government had not taken swift action to bail out troubled organizations and to prop up the economy while it recovered.