Chapter 1

1. Chapter 1 Introduction to Business in the United States

2. Learning Objective 1 Describe the four factors of production.

3. Natural Resources Capital Labor Entrepreneurship Factors of Production Production

4. Learning Objective 2 Explain the basic concepts of capitalism and how they relate to the profit motive.

5. Economic Systems Planned economy Communism Market economy Capitalism

6. The Profit Motive The profit motive stimulates a person to do something when the benefit derived from doing it is greater than the sacrifice required to do it.

7. ? The Profit Motive Steve wants to buy a pair of pants. Tanner’s price is $50.00. Chelsea’s price is $45.00. Tanner’s cost is $30.00. Invisible hand

8. Learning Objective 3 Distinguish between gross and net income. Be able to calculate each.

9. Gross Profit At a selling price of $50.00, what is Tanner’s gross profit or gross margin? $50.00 – $30.00 = $20.00

10. Who is a Stakeholder? A stakeholder is anyone to whom a company owes a responsibility; anyone who has a stake in the way a company is run.

11. Learning Objective 4 Distinguish among the three basic forms of business organizations and describe the advantages and disadvantages of each.

12. Forms of Business Organizations Proprietorships Partnerships Corporations

13. Proprietorships What are some advantages? easy and inexpensive to establish total control What are some disadvantages? unlimited liability limited access to capital

14. Partnerships What are some advantages? easy to establish access to more capital What are some disadvantages? unlimited liability sharing of profits

15. Corporations What are some advantages? limited liability greater access to capital easy transferability of ownership What are some disadvantages? greater tax burden greater government regulations

16. Learning Objective 5 Distinguish among the three major types of business activities and define hybrid type businesses.

17. Types of Business Activities Manufacturing Merchandising Service Hybrid

18. Learning Objective 6 Explain the basic need for international business trade and the complications involved in this activity.

19. Global Nature of Businessin the 21st Century Imports Exports Products brought into a country Products produced in a country but sold outside that country

20. Global Nature of Businessin the 21st Century Economic complications Political complications Quotas Tariffs

21. Business and Accounting Business is about making decisions. Accounting information plays a significant role in decision making.

22. Learning Objective 7 Describe what is shown in each of the four financial statements.

23. Introduction to Financial Accounting Reports Management accounting Financial accounting

24. The Balance Sheet Assets Owners’ Equity Liabilities Assets = Liabilities + Owners’ equity

25. The Balance Sheet Microsoft Balance Sheet June 30, 2001 (in millions) Assets $59,257 Liabilities $11,968 Stockholders’ equity $47,289 Total liabilities and _____ stockholders’ equity $59,257

26. Microsoft Income Statement For the year ended June 30, 2001 (in millions) Revenue $25,296 Expenses –17,950 Net income $ 7,346 The Income Statement Revenues – Expenses = Net income

27. The Statement ofOwners’ Equity Beginning equity + Investment by owners + Net income – Distribution to owners = Ending equity

28. Microsoft Statement of Cash Flows For the year ended June 30, 2001 (in millions) Cash from operating activities $13,422 Cash used for investing activities – 8,734 Cash used for financing activities – 5,612 Net change in cash – 942 Cash, beginning of year 4,846 Cash, end of year $ 3,922 The Statement of Cash Flows Cash inflow – Cash outflow + Beginning cash = Ending cash

29. Learning Objective 8 Discuss the SEC’s and FASB’s authority over accounting reporting standards and describe the current standard-setting process in the United States.

30. Authority overAccounting Reports Securities and Exchange Commission (SEC) A federal agency with oversight powers Financial Accounting Standards Board (FASB) Establishes and improves reporting standards (private sector agency)

31. Learning Objective 9 Describe the basic objectives of financial reporting.

32. The Conceptual Frameworkof Accounting Objectives: To provide information 1. Useful in investment and credit decisions 2. Useful in assessing future cash flows 3. About enterprise resources, claims to resources, and changes in them.

33. The Conceptual Frameworkof Accounting Qualitative Characteristics 1. Primary qualities A. Relevance (1) Predictive value (2) Feedback value (3) Timeliness B. Reliability (1) Representational faithfulness (2) Verifiability (3) Neutrality 2. Secondary qualities A. Comparability B. Consistency

34. The Conceptual Frameworkof Accounting Elements 1. Assets 2. Liabilities 3. Equity 4. Investment by owners 5. Distributions to owners 6. Comprehensive income 7. Revenues 8. Expenses 9. Gains 10. Losses

35. The Conceptual Frameworkof Accounting Assumptions 1. Economic entity 2. Going concern 3. Monetary unit 4. Periodicity Constraints 1. Cost/benefit 2. Materiality 3. Industry practice 4. Conservatism Principles 1. Historical cost 2. Revenue recognition 3. Expense recognition 4. Full disclosure

36. The Standards-Setting Process 1. Identifying issues 2. Setting an agenda 3. Appointing a task force 4. Creating a discussion memorandum 5. Holding public hearings

37. The Standards-Setting Process 6. Inviting comment letters 7. Deliberating 8. Writing an exposure draft 9. Issuing a Statement of Financial Accounting Standards 10. Conducting a post-enactment review

38. Learning Objective 10 Explain the purpose of an independent financial audit and describe the four basic types of audit opinions.

39. Outside Assurance onFinancial Statements The auditor examines the client’s financial statements and supporting documentation to determine whether the statements present a fair picture of the client’s financial condition and results of its operations. Auditors also evaluate the policies and procedures that are in place to safeguard company assets.

40. Outside Assurance onFinancial Statements In the United States, only licensed certified public accountants (CPAs) are permitted to perform independent audits. Not all CPAs are auditors.

41. Unqualified Opinion Disclaimer of Opinion Qualified Opinion Adverse Opinion Four Possible Audit Opinions Audit Option

42. Learning Objective 11 Gather information about a company and obtain an annual report.

43. Corporate Reporting and the Annual Report The annual report includes a variety of information including financial statements. The form 10-K is required by the SEC.

44. Learning Objective 12 Describe the information found in a typical annual report and Form 10-K.

45. Outline of the Contents ofForm 10-K Annual Report Part I Item 1. Business Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Part II Item 5. Market for the Company’s Common Equity and Related Stockholder Matters Item 6. Selected Financial Data

46. Outline of the Contents ofForm 10-K Annual Report • Item 7. Management’s Discussion and Analysis of • Financial Condition and Results of Operations • Item 8. Financial Statements and • Supplementary Data • Item 9. Changes in and Disagreements with • Accountants on Accounting and • Financial Disclosure • Part III • Item 10. Directors and Executive Officers • of the Company

47. Outline of the Contents ofForm 10-K Annual Report Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions Part IV Item 14. Exhibits, Financial Statements and Schedules, and Reports on Form 8-K

48. End of Chapter 1