Final Module Study Notes

1. Chapter 1

1.1. Terms

1.1.1. Money

1.1.1.1. And items that serves as a method of payment.

1.1.2. Finance

1.1.2.1. Activities involved with saving, investing, and using money by individuals, businesses, and governments.

1.1.3. Financial Systems

1.1.3.1. Interactions between three main participants: Individual consumers & Investors, Businesses, Government

1.1.4. Interest Rates

1.1.4.1. The price of money

1.1.4.2. They determine where funds flow and how much risk someone is willing to take for a certain price.

1.1.4.3. Determined by the forces of supply and demand.

1.1.4.3.1. Exchange rates, inflation rates, the money supply, government regulations, the effectiveness of laws, and expectations all influence interest rates.

1.1.4.4. When consumer saving and investing increase the supply of money, interest rates tend to decrease.

1.1.4.5. As borrowing by consumers, business, and governments increases, interest rates are likely to rise.

1.1.5. Inflation

1.1.5.1. Rise in the general level of prices.

1.1.5.1.1. In U.S., the consumer price index (CPI).

1.1.6. Money Supply

1.1.6.1. The amount of money in circulation in an economy.

1.1.6.2. Affects spending and borrowing.

1.1.6.2.1. Too much can result in lower interest rates.

1.1.6.2.2. Too little may push rates up, resulting in reduced consumer spending and increased unemployment.

1.1.7. Trade Surplus

1.1.7.1. Country exports more that it imports.

1.1.8. Trade Deficit

1.1.8.1. Country import more than it exports.

1.1.9. Foreign Exchange Rate

1.1.9.1. The value of a countries currency in relation to the value of the money of another country.

1.1.10. Markets

1.1.10.1. Whenever you bur or sell something, you participate in a market.

1.1.11. Financial Market

1.1.11.1. A location (physical or online) where buyers and sellers of financial products meet to conduct business.

1.1.11.2. The buying and selling of various assets and investments.

1.1.11.3. Investment types

1.1.11.3.1. Physical - houses, land, gold, rare coins.

1.1.11.3.2. Ownership

1.1.11.3.3. Lending

1.1.11.4. Commonly classified into two major categories.

1.1.11.4.1. Money Markets [short]

1.1.11.4.2. Capital Markets [long]

1.1.11.5. Organized process for the exchange of capital and credit.

1.1.12. Money Markets

1.1.12.1. Short-term debt securities

1.1.12.2. Help operate on a daily basis

1.1.12.3. Less that one year

1.1.12.4. Usually have lower risk than investments with longer maturities.

1.1.12.5. Examples

1.1.12.5.1. Treasury Bills

1.1.12.5.2. Certificates of Deposit (CDs)

1.1.12.5.3. Commercial Paper

1.1.13. Capital Markets

1.1.13.1. Long-term Securities

1.1.13.2. Funds for long-term use, it will become involved in capital markets.

1.1.13.3. Issued for more than a year.

1.1.13.4. Examples

1.1.13.4.1. Treasury Notes & Bonds

1.1.13.4.2. Command & Preferred Stock

1.1.13.4.3. Corporate & Municipal Bonds

1.1.14. Debt Securities

1.1.14.1. Borrowing by companies or governments.

1.1.14.2. Examples of debt securities include bonds, issued by corporations and municipal bands that are issued by the state and local governments.

1.1.15. Equity Securities

1.1.15.1. Represent ownership

1.1.15.2. Most common type is stock.

1.1.16. Securities

1.1.16.1. Investment instrument issued by a corporation, government, or other organization representing ownership [stock] or a debt [bond].

1.1.16.2. Stock, bonds, and other examples are mutual funds, certificates of deposit (CDs), and commodity futures.

1.1.17. Stock

1.1.17.1. Security representing ownership in a corporation.

1.1.18. Bond

1.1.18.1. Is a debt, money that is borrowed by a company or government.

1.1.18.2. A "Debt Security"

1.1.19. Municipal Bonds

1.1.19.1. A debt security issued by a state or local government.

1.1.19.2. Usually pay lower interest rates than other types of investments.

1.1.19.3. Still attractive for two main reasons though

1.1.19.3.1. They are low in risk.

1.1.19.3.2. Interest earned is not subject to income tax.

1.1.20. Future Cash Flows

1.1.20.1. Investors expectation in the future to receive money.

1.1.20.2. Expected return

1.1.20.3. Rate of return

1.1.21. Expected Return

1.1.21.1. Amount of future cash inflows.

1.1.22. Rate of Return

1.1.22.1. The relationship between the amount received and the cost of an investment.

1.1.23. Yield

1.1.23.1. See Rate of return

1.1.24. Risk

1.1.25. Liquidity

1.1.25.1. The ease and speed with which an investment can be converted into cash.

1.1.26. Personal Financial Planning

1.1.26.1. The process of managing your money to achieve personal economic satisfaction.

1.1.27. Financial Plan

1.1.27.1. A formal report with a summary of your current financial situation along with the plans for future financial activities.

1.1.28. Assets

1.1.28.1. Items you own.

1.1.29. Liabilities

1.1.29.1. Amounts you owe to others.

1.1.30. Personal Financial Goal

1.1.30.1. A desired outcome for financial planning.

1.1.31. Opportunity Cost

1.1.31.1. What you give up for making a choice.

1.1.32. Time Value of Money

1.1.32.1. Measures the increase in an amount of money as a result of interest earned.

1.1.33. Budget

1.1.33.1. A spending plan.

1.1.34. Diversification

1.1.34.1. Investing in a variety of assets.

1.1.35. Financial Institutions

1.1.35.1. Handle money receipts, payments, and lending.

1.1.35.2. Viewed as two main categories

1.1.35.2.1. Deposit Institutions

1.1.35.2.2. Non-deposit Institutions

1.1.36. Financial Intermediaries

1.1.36.1. See Financial Institutions

1.1.37. Deposit Institutions

1.1.37.1. Also called Depository Institutions

1.1.37.2. Accept deposits from people and businesses to use in the future.

1.1.37.3. Categories

1.1.37.3.1. Commercial Banks

1.1.37.3.2. Thrift Institutions

1.1.37.3.3. Credit Unions

1.1.38. Commercial Banks

1.1.38.1. Also called full-service banks

1.1.38.2. Offer a wide range of financial services.

1.1.38.2.1. Checking accounts

1.1.38.2.2. Savings accounts

1.1.38.2.3. Loans

1.1.38.3. A "Deposit Institution"

1.1.39. Thrift Institutions

1.1.39.1. Two types

1.1.39.1.1. Mutual Savings Bank

1.1.39.1.2. Savings and Loan Association (S&L)

1.1.39.2. A "Deposit Institution"

1.1.40. Savings and Loan Association (S&L)

1.1.40.1. Specializes in savings accounts and making loans for home mortgages.

1.1.40.2. Recent years, they've expanded their services and become more like banks.

1.1.40.3. Many use "savings bank" in their names.

1.1.40.4. A "Deposit Institution"

1.1.41. Mutual Savings Bank

1.1.41.1. Organized mainly for savings and home loans.

1.1.41.2. It is owned by the depositors.

1.1.41.3. Profits of the mutual savings bank go to the depositors.

1.1.41.4. Located mainly in northeastern U.S..

1.1.41.5. A "Deposit Institution"

1.1.42. Credit Unions

1.1.42.1. User-owned

1.1.42.2. Not-for-profit

1.1.42.3. Cooperative financial institution

1.1.42.4. Commonly formed by people in the same organization

1.1.42.5. Serving members only, accept savings deposits and make loans for a variety of purposes.

1.1.42.6. A "Deposit Institution"

1.1.43. Non-deposit Institutions

1.1.43.1. Includes

1.1.43.1.1. Life Insurance Companies

1.1.43.1.2. Investment Companies

1.1.43.1.3. Consumer Finance Companies

1.1.43.1.4. Mortgage Companies

1.1.43.1.5. Check-Cashing Outlets

1.1.43.1.6. Pawnshops

1.1.44. Life Insurance Companies

1.1.44.1. A "Non-deposit Institution"

1.1.44.2. Commonly buy to provide financial security for their dependents.

1.1.44.3. Can also offer financial services such as investments.

1.1.44.4. By investing in companies, life insurance companies help to expand business in an economy.

1.1.45. Investment Companies

1.1.45.1. A "Non-deposit Institution"

1.1.45.2. Help people to choose investment opportunities for long-term growth of their money.

1.1.45.3. Mutual funds made available by these investment companies.

1.1.46. Consumer Finance Companies

1.1.46.1. A "Non-deposit Institution"

1.1.46.2. Specialize in loans for durable goods - cars, house hold items, for financial emergencies.

1.1.46.3. Do no accept savings as do banks and other institutions.

1.1.47. Mortgage Companies

1.1.47.1. A "Non-deposit Institution"

1.1.48. Check-Cashing Outlets (CCOs)

1.1.48.1. A "Non-deposit Institution"

1.1.49. Pawnshops

1.1.49.1. A "Non-deposit Institution"

1.1.50. Inflows

1.1.50.1. See "Sources Of Funds"

1.1.51. Outflows

1.1.51.1. See "Uses of Funds"

1.1.52. Revenue

1.1.52.1. The inflow of cash from business operations. Funds resulting from sales of goods and services.

1.1.53. Investor Funds

1.1.53.1. The result of money from existing or new owners of a company.

1.1.53.2. Selling stock would be an example.

1.1.54. Capital Expenditures

1.1.54.1. Long-term spending for items that will be used over a longer period of time (more than a year).

1.1.54.2. Also called, "Capital Projects"

1.1.55. Capital Projects

1.1.55.1. See Capital Expenditures.

1.2. Broad Topics

1.2.1. Factors Affecting Financial Activities

1.2.1.1. Economic Conditions

1.2.1.1.1. Interest Rates

1.2.1.1.2. Consumer Prices

1.2.1.1.3. Money Supply

1.2.1.2. Governmental Regulations

1.2.1.2.1. Can create regulations for fairness in financial transactions.

1.2.1.2.2. Securities and Exchange Commission (SEC)

1.2.1.2.3. Federal Reserve System

1.2.1.2.4. Comptroller of the Currency

1.2.1.2.5. Federal Deposit Insurance Corporation (FDIC)

1.2.1.2.6. National Credit Union Administration (NCUA)

1.2.1.3. Global Business Activities

1.2.1.3.1. Trade Surplus

1.2.1.3.2. Trade Deficit

1.2.1.3.3. Foreign Exchange Rate

1.2.2. Financial Markets

1.2.2.1. Commonly classified into two major categories.

1.2.2.1.1. Money Markets [short]

1.2.2.1.2. Capital Markets [long]

1.2.3. Value Of Securities

1.2.3.1. Supply and Demand

1.2.3.1.1. As the investment is desired, the value of it will most likely increased.

1.2.3.1.2. If demand for the stock goes down, the value of it will decrease.

1.2.3.2. Future Cash Flows

1.2.3.2.1. Large amounts of future cash flows will increase the value a person will pay for an investment.

1.2.3.3. Risk

1.2.3.3.1. Investors consider the risks - examples; changing economic conditions, political uncertainty, and shifting consumer buying preferences.

1.2.3.4. Liquidity

1.2.3.4.1. The value of a security is often influenced by its ability to converted into cash.

1.2.3.5. Interest Rates

1.2.3.5.1. If interest rates rise, more people will likely put money in savings accounts instead of buying stock. This change will usually result in lower stock values.

1.2.4. Personal Financial Planning

1.2.4.1. Main benefits are

1.2.4.1.1. Better actions for using your finances

1.2.4.1.2. Effective control of your spending

1.2.4.1.3. Improved personal relationships

1.2.4.1.4. A sense of freedom from financial worries

1.2.4.2. Creation of a financial plan.

1.2.4.3. Influences on personal financial decisions

1.2.4.3.1. Personal Life Situation

1.2.4.3.2. Economic Factors

1.2.4.4. The Financial Planning Process

1.2.4.4.1. Five recommended steps

1.2.4.5. Personal Financial Decisions

1.2.4.5.1. Decisions in five areas

1.2.5. Sources And Users Of Funds

1.2.5.1. Sources Of Funds

1.2.5.1.1. The inflow of cash or credit that can be used for paying various expenses.

1.2.5.1.2. Three common expenses

1.2.5.2. Uses of Funds

1.2.5.2.1. Involves the outflow of money by a company to make payments for various business costs and other necessary expenses.

1.2.5.2.2. Two main categories

1.2.6. Government Financial Activities

1.2.6.1. Functions Of Government

1.2.6.1.1. Providing public services

1.2.6.1.2. Protecting citizens, consumers, business, workers

1.2.6.1.3. Regulating financial & other business activities, while promoting competition.

1.2.6.1.4. Provide information & assistance to business.

1.2.6.1.5. Purchasing goods & services for government operations.

1.2.6.1.6. Hiring public employees to serve citizens.

1.2.6.1.7. Raising revenue to finance various public services & government projects.

1.2.6.2. Levels Of Government

1.2.6.2.1. Federal

1.2.6.2.2. State

1.2.6.2.3. Local

1.2.6.3. Sources Of Government Funds

1.2.6.3.1. Taxes

1.2.6.3.2. Borrowing

1.3. Teacher Notes

1.3.1. 1.1 An interest rate is the price for money. As such, they determine where funds flow and how much risk someone is willing to take for a certain price. Exchange rates, inflation rates, the money supply, government regulations, the effectiveness of laws, and expectations all influence interest rates. Note what types of securities are traded in money markets and what types in capital markets. The value of bonds and stocks is determined by the factors listed on p 8. The most important of these are future cash flows, level of risk associated with those cash flows, and the price of the cash flows (interest rates).

1.3.2. 1.2 The financial planning process on p 12 is the same process one uses to solve any type of problem. Note that every decision you make has an opportunity cost- what you could have otherwise done with your time or money. People get into trouble when they don’t plan and when they don’t stick with the plan.

1.3.3. 1.3 It is very hard to tell the difference between banks, savings and loans , credit unions and investment companies these days. The requirements are changing daily. What’s important today is how much regulation is there and how safe are your funds?

1.3.4. 1.4 The key point here is learning how they government raise revenue-through taxes and fees. They also finance their spending by selling Treasury bonds and bills. T-Bills are < 1 year duration; T-Notes are 1-10 years duration and T-Bonds are over 10 years duration

1.4. Teacher Overview

1.4.1. Financial Fundamentals

1.4.1.1. Finance in Society

1.4.1.1.1. A financial system involves financial activities among individuals, business, and government. Major factors that affect financial activities are changing economic conditions, government regulations, and global business activities.

1.4.1.1.2. The two major types of financial markets are money markets and capital markets. The value of investments securities is influenced by supply and demand, future cash flows, risk, liquidity, and interest rates.

1.4.1.2. Personal Financial Decisions

1.4.1.2.1. Personal financial planning involves a five-step process: (1) determine current situation, (2) set financial goals, (3) evaluate alternatives, (4) create an action plan, and (5) review process.

1.4.1.2.2. The major areas of financial decision making are: obtaining financial resources, planning the use of resources, saving and investing, borrowing, and managing financial risks.

1.4.1.3. Business Financial Activities

1.4.1.3.1. The major types of deposit institutions are commercial banks, savings and loan associations, mutual savings banks, and credit unions. Non-deposit financial institutions include life insurance companies, investment companies, consumer finance companies, mortgage companies, check-cashing outlets, and pawnshops.

1.4.1.3.2. Common sources of funds are company revenue, investor funds, and borrowing. The use of funds involves outflow of money for current expenses and capital expenditures.

1.4.1.4. Government Finances

1.4.1.4.1. Federal, state, and local governments provide public services, protect citizens and others, regulate financial activities, provide information, purchase goods and services, hire public employees, and raise revenue.

1.4.1.4.2. The main sources of government funds are taxes and borrowing

2. Chapter 2

2.1. Terms

2.1.1. Economics

2.1.1.1. The science of decision making about the allocation of scarce resources.

2.1.2. Scarcity

2.1.2.1. Scarcity means that people have wants and needs that are greater than can be satisfied with the available products and services.

2.1.3. Choice

2.1.3.1. Choice means deciding which wants and needs will be satisfied and which will go unsatisfied.

2.1.4. Resources

2.1.4.1. The means available to develop solutions for unsatisfied wants and needs.

2.1.4.2. Individuals Resources are

2.1.4.2.1. Time

2.1.4.2.2. Money

2.1.4.2.3. Skills

2.1.4.3. Companies and countries are

2.1.4.3.1. Three main types

2.1.5. Natural Resources

2.1.5.1. Materials in the world around us.

2.1.6. Capital Resources

2.1.6.1. Human-made goods used in production of other products and services.

2.1.7. Human Resources

2.1.7.1. The people and their skills, including both physical and mental abilities.

2.1.7.2. Sometimes referred to as labor.

2.1.8. Supply and Demand

2.1.8.1. Supply is the quantity of a product or service that has been produced by businesses with the hope of making a profit from the sales to customers.

2.1.8.2. Demand is the amount of a product or service that individuals want to buy or satisfy their wants and needs.

2.1.9. Market Price

2.1.9.1. The price at which an equal number of products will be produced and purchased.

2.1.10. Microeconomics

2.1.10.1. The level of economic decisions related to the choices of individuals and businesses.

2.1.11. Macroeconomics

2.1.11.1. Economic decisions at a national level.

2.1.12. Traditional Economy

2.1.12.1. Very little government influence or control.

2.1.12.2. Individuals and families are unchanged for generations.

2.1.12.3. They do the same work using many of the same tools and procedures that their ancestors did.

2.1.13. Command Economy

2.1.13.1. The government has the primary influence on economic decisions.

2.1.13.2. Government decision-makers determine what goods and services are needed and how and when they will be produced.

2.1.13.3. They influence the work people do.

2.1.13.4. Determine what is available for consumers to purchase as well as the prices what will be charged.

2.1.14. Market Economy

2.1.14.1. Based upon the combination of the decisions made by individual consumers and businesses.

2.1.14.2. All businesses can decide what they will produce and how. They decide what is appropriate for their products and services.

2.1.14.3. Individual consumers can decide how they will spend their money. Free to buy the products and services they want and determine how much they are willing to pay for each choice.

2.1.15. Financial Market

2.1.16. Financial Return

2.1.16.1. A profit earned from an investment.

2.1.17. Financial Risk

2.1.17.1. The possibility that an expected profit will not be achieved.

2.1.18. Term

2.1.18.1. The length of time the invested money is controlled by others.

2.2. Broad Topics

2.2.1. The Economic Principles

2.2.1.1. Scarcity

2.2.1.2. Choice

2.2.1.3. Supply

2.2.1.4. Demand

2.2.2. Making Economic Decisions

2.2.2.1. What products and services will be produced?

2.2.2.2. How will the needed products and services be produced?

2.2.2.3. For whom will the products and services be produced?

2.2.3. U.S. Free Enterprise Economy

2.2.3.1. Principles

2.2.3.1.1. Right of Private Ownership

2.2.3.1.2. Freedom of Choice

2.2.3.1.3. Competition among Business

2.2.3.1.4. Consumer Influence on Economic Activity

2.2.3.1.5. A Limited Government Role in the Economy

2.2.3.2. The mixed economy of the U.S. is often referred to as a "free enterprise economy".

2.2.4. Legal Forms of Business Ownership

2.2.4.1. Sole Proprietorship

2.2.4.1.1. Owned and managed by one person. All financial and operating decisions are made by the owner of the business. They are totally responsible for the success or failure of the business. A sole proprietorship can be formed with almost no legal requirements.

2.2.4.2. Partnership

2.2.4.2.1. Owned and managed by two or more people under the conditions of a legal written agreement.. The agreement identifies each partners financial obligations, managerial and operational responsibilities, and how the partnership can be expanded or dissolved.

2.2.4.2.2. Limited Partnership

2.2.4.3. Corporation

2.2.4.3.1. A distinct legal entity formed by completing required legal documents in a specific state. It is owned by one or more shareholders who have invested in the business and is managed by a board of directors. A corporation is treated legally as if it were an individual, meaning it can enter into contracts and is subject to taxes and business laws.

2.2.4.3.2. Private Corporation

2.2.4.3.3. Public Corporation

2.2.4.3.4. Dividends

2.2.4.3.5. Subchapter C Corporation

2.2.4.3.6. Subchapter S Corporation

2.2.4.4. Limited Liability Company (LLC)

2.2.4.4.1. A newer legal for of business ownership. Companies that combine features of the partnership and corporation, offering some of the advantages of each. They are formed with a written agreement that is simpler than the documents required of a corporation and more like a partnership agreement. LLCs offer more financial protection for investors than a partnership and similar to that given to stockholders of a corporation.

2.2.5. Common Financial Markets

2.2.5.1. Commodity Markets

2.2.5.1.1. Trade raw materials and other basic production resources.

2.2.5.1.2. Two types of markets

2.2.5.2. Stock Markets

2.2.5.2.1. The organized exchange of the ownership shares of public corporations.

2.2.5.2.2. The buying and selling of stock occurs in the stock exchanges.

2.2.5.2.3. Stock Offerings

2.2.5.3. Other Financial Markets

2.2.5.3.1. Bond Markets

2.2.5.3.2. Money Markets

2.3. Teacher Notes

2.3.1. 2.1 There is an economic component to every subject you can think about. Economics is the study of how people make decisions about allocating their resources- individuals, businesses, and governments. As in Chapter 1, there is an opportunity cost to every decision. Generally prices determine the amounts consumers demand and the amounts producers are willing to supply. Note the factors of the US Free Enterprise economy on p 38. What has made the US economy the most powerful has been the effectiveness of laws and limited government involvement. Of course, all of this has changed dramatically since Sept 2008 and the effectiveness of our economy is now in considerable doubt.

2.3.2. 2.2 Note the various types of business legal structure on p 42. The corporation is popular because of limited liability for the owners. However profits are double taxed in some instances, first as income to the corp and then as dividend income to the stockholders. There are about 10 million businesses in the US and only about 6000 are publicly owned.

2.3.3. 2.3 The more financial risk an investor takes on, the higher is their expected return. Generally a short term investment is one held for a year or less. Income from them is usually taxed at ordinary income tax rates. Long term investments are held over a year. Gains upon their sale are taxed at capital gain rates which are currently 15%. Note the difference between commodity markets, stock markets, bond markets, capital markets, money markets, and grocery markets.

2.3.4. 2.4 As businesses expand internationally (called globalization) they incur many issues in addition to cheaper labor and more customers p55. Foreign currencies and exchange rates are based on the supply and demand for money of the respective country.

2.4. Teacher Overview

2.4.1. Financial Environment of Business

2.4.1.1. Basic Economic Systems and Principles

2.4.1.1.1. Financial decisions are influenced as much by the economy as by any other factors. Effective financial planning and decision making require an understanding of the economy and economic principles.

2.4.1.1.2. Business and individuals make decisions about what to produce and what to consume. Microeconomics is about economic decisions related to the choices of individuals and businesses. Macroeconomics is about economic decisions made at a national level.

2.4.1.2. Legal Forms of Business

2.4.1.2.1. The way a business is organized plays a major role in its financial condition. It will determine how much money is available to start the business, how additional funds can be obtained when needed, how income and expenses are allocated and accounted for, and even the amount of taxes paid by the business and business owner.

2.4.1.2.2. Many factors enter into the decision about the form of business ownership. These include the amount of individual responsibility and control, the simplicity or complexity of forming and managing the business, and differences in legal requirements and liability. A major consideration is the financial implication for owning and operating each type of business.

2.4.1.3. Types of Financial Markets

2.4.1.3.1. Financial markets and financial institutions have developed to facilitate exchanges between those who need money and those who have money. A financial market is an organized process for the exchange of capital and credit. Some basic principles of financial exchange guide the activities of those markets and institutions.

2.4.1.3.2. Sellers want to obtain the highest price possible for their resources while buyers want to purchase those resources at the lowest price. Financial markets help identify the available supply and demand for a specific resource in order to determine the market price at a particular time. The market manages the exchange between buyers and sellers.

2.4.1.4. Global Financial Activities

2.4.1.4.1. Corporate ownership is often multinational and business investments are made with little regard for country boundaries. A global or multinational business is a company that transcends national boundaries and is not committed to a single home country.

2.4.1.4.2. International business requires international finance. Money must be exchanged from one countries currency to that of the other country. Business and individual investors participate in the global business economy by investing in businesses of other countries.

3. Chapter 3

3.1. Terms

3.1.1. Business financial goals

3.1.1.1. Establish direction for the financial plans of a business.

3.1.2. Creditor

3.1.2.1. Is an individual or an organization that provides funds to a business, with repayment of the funds and agreed-upon interest due to a future date.

3.1.3. Principal

3.1.3.1. The amount of money borrowed

3.1.4. Interest

3.1.4.1. The amount paid for the privilege of borrowing money. Must be made to all creditors.

3.1.5. Interest Rate

3.1.5.1. The cost of borrowing money, expressed as a percentage of the amount borrowed, usually over a period of one year.

3.1.5.2. Either paid as simple interest or compound interest.

3.1.6. Collateral

3.1.6.1. An asset promised by a business to a creditor if repayment of a loan isn't completed.

3.1.7. Financial Statements

3.1.7.1. Are specific reports prepared according to accepted accounting standards that provide financial information about an enterprise.

3.1.7.2. Three primary financial statements

3.1.7.2.1. balance sheet

3.1.7.2.2. income statement

3.1.7.2.3. cash flow statement

3.1.7.3. In order to be useful for decision-making, financial statements must be

3.1.7.3.1. understandable

3.1.7.3.2. reliable

3.1.7.3.3. comparable

3.1.7.4. Guidelines established by the Financial Accounting Standards Board and endorsed by the the American Institute of Certified Public Accountants.

3.1.7.5. Public Corp's required by SEC to prepare financial statements and have them audited by an independent certified public accountant.

3.1.8. Balance Sheet

3.1.8.1. Known as the statement of financial position, identifies the assets, liabilities, and equity of a business as of a specific date.

3.1.8.2. a specific date.

3.1.8.3. Describes what the company owns, what it owes, and its value to the owners.

3.1.8.4. Organized around the basic accounting equation

3.1.8.4.1. Assets = Liabilities + Owners Equity

3.1.9. Financial Position

3.1.9.1. Also called Balance Sheet

3.1.10. Income Statement

3.1.10.1. Provides a view of the financial changes in a business that have occurred during a specified period of time.

3.1.10.2. specified period of time.

3.1.10.3. It documents all income and expenses during that period and the resulting profit or loss earned.

3.1.10.4. Just like a balance sheet, an income statement needs to be prepared at least once a year but is usually prepared very frequently, often once a month.

3.1.10.5. Profit or loss calculated on a income statement

3.1.10.5.1. The value of a country's currency in relation to the value of the money of another country.

3.1.10.5.2. Usually before taxes is calculated followed by subtracting the amount of taxes paid. The result is the business' net income or loss for the period

3.1.11. Cash Flow Statement

3.1.11.1. Prepared to show how cash is used by a business during a specified time period.

3.1.11.2. Neither the balance sheets nor the income statements disclose all of the important financial information needed to understand a company's financial strengths or weaknesses.

3.1.11.2.1. Financial data reported on both statements does not necessarily reflect the actual cash received and spent by the business during the time period represented.

3.1.11.2.2. A lack of cash may mean that too much credit is being extended to customers or the company has too many current liabilities.

3.1.11.3. Separates cash flows into categories of

3.1.11.3.1. Cash receipts

3.1.11.3.2. Cash payments

3.1.12. Assets

3.1.12.1. All the things a business owns and uses as a part of business operations

3.1.12.2. Currents Assets

3.1.12.2.1. Short life of less than a year.

3.1.12.2.2. Cash, inventory, materials and supplies, and accounts receivable.

3.1.12.3. Long-term Assets

3.1.12.3.1. Longer life of a year or more and often define the nature of the business.

3.1.12.3.2. Buildings, land, equipment, patents, investments made by the company for a period longer than a year, and other owned resources used by the business.

3.1.12.4. The value of most long-term assets decreases over time.

3.1.13. Depreciation

3.1.13.1. Decline in the value of an asset as it ages.

3.1.13.2. The method used to calculate depreciation is established by federal tax laws.

3.1.14. Liabilities

3.1.14.1. The things that the business owes to others.

3.1.14.2. Current Liabilities

3.1.14.2.1. Those that will paid for within a year.

3.1.14.2.2. Accounts payable, which are purchases for which supplies have provided short-term credit

3.1.14.2.3. Loans that must be repaid quickly

3.1.14.2.4. Wages and taxes owed

3.1.14.3. Long-term Liabilities

3.1.14.3.1. Any for which payment will not be made in full for more than a year.

3.1.14.3.2. Mortgages on land and buildings

3.1.14.3.3. long-term purchase agreements

3.1.14.3.4. multi-year leases on equipment

3.1.15. Owner's Equity

3.1.15.1. The total value that all owners and investors have in the firm

3.1.15.2. In a corporation, owner's equity is the value of all stock and any profits being held by the business.

3.1.15.3. In proprietorships and partnerships, owner's equity is the total amount the owners have invested in the business and the increase (or decrease) in value of the business resulting from its operations.

3.1.16. Financial Budget

3.1.16.1. A projected financial statement for a specific future time period.

3.1.17. Budget Discrepancies

3.1.17.1. Differences between budgeted amounts and actual financial performance

3.1.18. Operating Budget

3.1.18.1. Projects all income and expenses for the operations of a business for a specific future time period.

3.1.18.2. It estimates all types of income, operating costs, expenses, and the projected profit and loss from operations.

3.1.19. Cash Budget

3.1.19.1. Is the estimate of the flow of cash into and out of a company for a specified time period.

3.1.20. Capital Budget

3.1.20.1. A plan to acquire and finance long-term assets of a business.

3.1.20.2. Costs of acquiring, expanding, upgrading, improving, and renovating the major assets of a company.

3.1.21. Trend Analysis

3.1.21.1. Trend analysis is a valuable method of developing budgets.

3.1.21.2. Examines financial performance over several periods of time to determine patterns. The patterns can then be used to improve forecasting.

3.1.22. Time Value of Money

3.1.22.1. The difference in purchasing power of an amount of money at a future date.

3.1.22.2. Is affected by inflation.

3.1.22.3. Also affected by interest rates that must be paid for loans or that can be earned on investments.

3.1.22.4. Compares the future value of money with the present value of an amount of money.

3.1.23. Discount

3.1.23.1. The amount of money subtracted from a loan at the time of lending equal to the interest charged by the lender.

3.1.23.2. If a business borrows $10,000 for one year from a bank at an interest (discount) rate of 8 percent, the bank will subtract $800 ($10,000 X .08). The actual amount of money received by the business is $9200. At the end of the year, the business must repay the bank $10,000.

3.2. Broad Topics

3.2.1. Business financial goals

3.2.1.1. Are developed to respond to three main financial needs

3.2.1.1.1. A business must meet its financial obligations and pay its debts.

3.2.1.1.2. A business must provide a competitive rate of return for its investors.

3.2.1.1.3. A business must finance future growth and improvement to remain competitive.

3.2.2. Characteristics of Effective Goals

3.2.2.1. Specific

3.2.2.1.1. A specific financial goal is directed at a particular business action.

3.2.2.2. Realistic

3.2.2.2.1. A realistic financial goal must be possible.

3.2.2.3. Measurable

3.2.2.3.1. A measurable goal identifies the financial performance that is expected to change.

3.2.2.4. Established for an Identified Period of Time

3.2.2.4.1. An identified time allows adequate time for the business to improve the identified performance as well as a time frame in which business usually measures performances.

3.2.3. Balance Sheet Components

3.2.3.1. Assets

3.2.3.2. Liabilities

3.2.3.3. Owner's Equity

3.2.4. Analyzing A Balance Sheet

3.2.4.1. Assets - Liabilities = Owner's Equity

3.2.5. Analyzing An Income Statement

3.2.6. Cash Flow Statement

3.2.7. Steps In Budget Preparation

3.2.7.1. Identify the type of budget and categories of financial information included in the budget.

3.2.7.2. Organize the information categories to reflect the financial calculations that must be completed in the budget.

3.2.7.2.1. Operating Budget is organized according to the profitability equation

3.2.7.2.2. Cash budget uses the formula

3.2.7.3. Gather and analyze internal and external information that will affect the budget.

3.2.7.4. Select the method of calculating budgeted amounts.

3.2.7.4.1. See Trend Analysis

3.2.7.5. Complete the budget by making the necessary financial calculations.

3.2.8. Interest Calculating

3.2.8.1. Simple Interest

3.2.8.1.1. The amount of interest is calculated at the end of each year based on the total amount borrowed.

3.2.8.1.2. i = Prt

3.2.8.1.3. $1,000 [ P ] X 0.05 [ r ] X 2 [ t ] = $100 [ i ] simple interest at the end of two years.

3.2.8.2. Compound Interest

3.2.8.2.1. Pays interest not only on the total amount borrowed but also on the interest that has been earned.

3.2.8.2.2. Calculating the future value of a loan or investment

3.2.8.2.3. To determine the amount of interest earned or due, subtract the principal of the loan or investment from the future value.

3.2.8.3. Future Value

3.2.8.3.1. FV - The amount to which an amount of money will grow in a defined period of time at a specified investment rate.

3.2.8.3.2. The total amount of principle and interest.

3.2.8.4. Actual Rate of Interest or Effective Rate

3.2.8.4.1. Usually the stated rate is the annual rate disregarding compounding.

3.2.8.4.2. The effective interest rate is the actual rate paid by the borrower or earned by the investor and includes compounding.

3.2.8.4.3. If the interest charged for the loan with a 10 percent APR is compounded quarterly, the effective interest rate is 10.38 percent.

3.2.9. Time Value of Money

3.2.9.1. Present Value

3.2.9.1.1. The current value of an amount of money to be received at a future date based on a specified investment rate.

3.2.9.2. Future Value

3.2.9.2.1. The amount to which an amount of money will grow in a defined period of time at a specified investment rate.

3.3. Teacher Notes

3.3.1. 3.1 Owners of businesses, whether active managers or inactive as shareholders expect a return on their investment of time and money. A business must provide a profit or it will be unable to meet its obligations to owners and creditors. In order to grow a business needs to plan how to invest today for future returns. Usually the business will need some type of financing to achieve these goals. One of the critical problems today (01/09) is that banks have tightened up their lending and many small business which depend on it are not getting the financing. Note characteristics of effective goals on p 69.

3.3.2. 3.2 Whenever a person or a business goes to a bank or other source of financing they will need to provide three or four types of financial statements. A Balance Sheet lists your assets (what you own) and your liabilities (what you owe). The items are listed in order of liquidity (how fast they can be converted to cash) and are as of a specific date. Assets –Liabilities= Net Worth or, Assets = Liabilities + Net Worth. Net Worth is what the owners have invested in the business so, in essence, the business owes them this amount.

3.3.3. 3.3 An Income Statement shows Income-Expenses= Profit over a certain period of time. Obviously one wants as high a profit as possible. Much depends on how revenues are recognized and how expenses are recorded. Some expenses such as depreciation do not require a cash outlay.

3.3.4. 3.4 A Cash Flow Statement measures Cash Inflow – Cash Outflows. This is ultimately the most important because it shows how much you can afford and when the money is available. For individual families this cash budget is critical. A good financial plan projects all of these statements as of a future date. One then compares actual with budgeted figures.

3.3.5. 3.5 Interest is the cost of money. If you buy a CD from a bank you charge them rent for using your funds. This rent is interest. The beauty of interest is that it compounds-meaning you get interest on top of interest. Because a person has the ability to earn a return on their savings, a dollar today is worth more than a dollar in the future. This is the concept of the Time Value of Money. If you can earn 5% per year on a savings account you are indifferent to $1.00 today or $1.05 a year from now. In two years you would have ($1.05)*(1.05)=$1.1025. Study this area carefully. You should know how to discount a future amount to a present value and how to determine the future value if you know the present value and interest rate. Much of finance is based on these applications. There are Appendixes on p 402-403.

3.4. Teacher Overview

3.4.1. Financial Management Planning

3.4.1.1. Business Financial Goals

3.4.1.1.1. Business financial goals are developed to respond to three main financial needs. A business must provide a competitive rate of return for its investors. It must meet its financial obligations and pay its debts. And it must finance future growth and improvement to remain competitive.

3.4.1.1.2. Business financial goals must have several elements to be effective. The goals must be specific, realistic, measurable, and established for an identified period of time.

3.4.1.2. Financial Statements

3.4.1.2.1. Financial statements are used to understand the financial health of a business and to make financial decisions. The balance sheet identifies the assets, liabilities, and owner's equity of a business as of a specific date.

3.4.1.2.2. The income statement provides a view of the financial changes in a business that have occurred during a specific period of time. It documents income and expenses and the resulting profit or loss.

3.4.1.2.3. A cash flow statement is prepared to show how cash is used by a business during a specified time period. A lack of cash may mean that too much credit is being extended to customers, or the company has too many current liabilities.

3.4.1.3. Financial Budgets

3.4.1.3.1. Financial budgets are prepared based on considerations of future events that could affect the business' financial performance and condition. The primary types of financial budgets are the operating budget, cash budget, and capital budget.

3.4.1.3.2. Budgets are not useful if they are not accurate. A budget should be prepared carefully, following a systematic process and drawing on information from inside and outside the company.

3.4.1.4. Interest and Time Value of Money

3.4.1.4.1. An interest rate is the cost of borrowing money, expressed as a percentage of the amount borrowed, usually over a period of one year. The amount of simple interest is calculated at the end of each year based on the total amount loaned. Compound interest is paid not only on the total amount borrowed but also on the interest earned.

3.4.1.4.2. Time value of money is used to determine the value of investments. Investment decisions are based on what can be purchased now versus what can be purchased with the same amount of money in the future, considering the effects of inflation and interest rates.

4. Chapter 4

4.1. Terms

4.1.1. Accounting

4.1.1.1. Responsible for organizing a system of financial records, recording financial data, and preparing , analyzing, and interpreting financial statements.

4.1.2. Finance

4.1.2.1. Saving, investing, and using money by individuals, business, and governments.

4.1.2.1.1. Broader than accounting

4.1.2.1.2. Consists of three interrelated areas

4.1.3. Equities

4.1.3.1. The financial claims on a company's resources. Those claims come from both creditors and owners.

4.1.4. Accounts

4.1.4.1. The financial records for each of the specific assets, liabilities, and categories of owner's equity are known as the business' accounts.

4.1.5. Accounting Transaction

4.1.5.1. The act of recording a financial activity that results in a change in value of an organization's resource.

4.1.5.2. The transaction will result in financial entries in the accounts of the business in a way that maintains their balance with each other.

4.1.6. Source document

4.1.6.1. the original record of a transaction. sales receipts, invoices, checks, etc.

4.1.7. Journals

4.1.7.1. Using source documents, transitions are recorded in business records called journals.

4.1.8. Journal Entry

4.1.8.1. Identifies the key information for the transaction, including date, amount, purpose, and the account affected.

4.1.9. Financial statements

4.1.9.1. Balance sheet

4.1.9.2. income statement

4.1.9.3. Cash flow statement

4.1.10. Accounting Cycle

4.1.11. Accrual Accounting

4.1.11.1. The accounting procedure that recognizes revenues and expenses when they are incurred rather than when cash is received or spent.

4.1.12. Due Case

4.1.12.1. A commitment to completing all tasks thoroughly and with the highest level of quality.

4.1.13. Annual Report

4.1.13.1. A statement of a company's operating and financial performance issued at the end of its fiscal year.

4.1.13.2. Often include: Lettter from chief executive, a narrative discussion of the year's operations, and plans for the future.

4.1.14. Form 10K

4.1.14.1. Similar to an annual report but may be even more detailed.

4.1.14.2. SEC requires public corporations to file this each year.

4.1.14.3. Company history, organizational structure, equity, holdings, earnings per share, subsidiaries, and audited financial statements.

4.1.15. Retained Earnings

4.1.15.1. Profits earned by a company that are not paid to shareholders as dividends.

4.1.16. Solvency

4.1.16.1. The ability of an organization to meet its financial obligations as they become due.

4.1.17. Financial Ratios

4.1.17.1. Financial ratios are comparisons of important financial data used to evaluate business performance.

4.1.18. Ratio Analysis

4.1.18.1. The study of relationships in a company's finances in order to understand and improve financial performances.

4.2. Broad Topics

4.2.1. Fundamental Accounting Equation

4.2.1.1. Assets = Liabilities + Owner's Equity

4.2.2. Accounting Cycle

4.2.2.1. A series of steps performed to ensure the completeness and accuracy of accounting records and to prepare summary financial statements.

4.2.2.2. Six basic steps

4.2.2.2.1. 1. Transactions are recorded in journals.

4.2.2.2.2. 2. Journal entries are posted in appropriate accounts.

4.2.2.2.3. 3. A trial balance of the accounts is prepared.

4.2.2.2.4. 4. Adjusting entries are recorded.

4.2.2.2.5. 5. Financial statements are prepared.

4.2.2.2.6. 6. Closing entries are completed.

4.2.2.3. Completing those steps is called "closing the books".

4.2.2.4. Normally the accounting cycle is completed monthly, quarterly, and at the end of the company's fiscal year.

4.2.3. Accounting Professional Practices

4.2.3.1. Assumptions

4.2.3.1.1. Single Economic Entity

4.2.3.1.2. Going Concern

4.2.3.1.3. Monetary Unit

4.2.3.1.4. Periodic Reporting

4.2.3.2. Accounting Principles

4.2.3.2.1. Historic Costs

4.2.3.2.2. Revenue Recognition

4.2.3.2.3. Expense and Revenue Matching

4.2.3.2.4. Full Disclosure

4.2.3.2.5. Standard Practice and Conservatism

4.2.3.3. Professional Practices

4.2.3.3.1. Professional Competence

4.2.3.3.2. Due Care and Sufficient Data

4.2.3.3.3. Independence and Integrity

4.2.4. Information System

4.2.4.1. A structured set of processes, people, and equipment for converting data into information.

4.2.4.2. Types of business financial information

4.2.4.2.1. Data - raw facts related to the financial transactions of the company.

4.2.4.2.2. Records - a collection of related data organized in a form that can be retrieved and viewed.

4.2.4.2.3. Reports - the organized presentation of financial data, often with notes, providing specific information on the financial condition or position of the organisation.

4.2.4.3. Information integrity

4.2.4.3.1. That information remains unchanged from its source and has not been accidentally or maliciously modified, altered, or destroyed.

4.2.4.4. Effective and Secure Information Systems

4.2.4.4.1. Record Selection

4.2.4.4.2. Information Maintenance

4.2.4.4.3. Information and System Security

4.2.4.4.4. Legal Integrity

4.2.4.4.5. System Maintenance and Improvement

4.2.5. Financial Management Activities

4.2.5.1. Corporation guided by a board of directors.

4.2.5.1.1. Represents the shareholders in oversight of the business.

4.2.5.1.2. Set direction for the business and establish corporate policy, hire and determine the compensation of the key executives, and review major business decisions.

4.2.5.2. Chief Executive Officer (CEO)

4.2.5.2.1. Charged with carrying out the strategy and policy of the board of directors.

4.2.5.2.2. Provides leadership for management and employees.

4.2.5.2.3. Sets long-term operational direction

4.2.5.2.4. Is accountable to the board for all company activities and results

4.2.5.3. Chief Operating Officer (COO)

4.2.5.3.1. Directs the actual operations of the business.

4.2.5.3.2. Generally, reports to the CEO.

4.2.5.4. Chief Financial Officer (CFO)

4.2.5.4.1. Responsible for planning and managing its financial resources.

4.2.5.4.2. Generally, reports to the CEO.

4.2.5.5. Treasurer

4.2.5.5.1. Generally, reports to the CFO.

4.2.5.5.2. Responsible for the management of a company's cash, investments, and other financial resources as well as relationships with investors and creditors.

4.2.5.6. Controller

4.2.5.6.1. Generally, reports to the CFO.

4.2.5.6.2. In charge of accounting and the financial records of the organization and provides support for executives and other managers in understanding and using financial data and reports.

4.2.6. Financial Management Decisions

4.2.6.1. Asset Planning

4.2.6.2. Asset Financing

4.2.6.2.1. Two major ways to finance asset acquisition are:

4.2.6.3. Asset Management

4.2.7. Understanding Financial Ratios

4.2.7.1. Financial ratios are comparisons of important financial data used to evaluate business performance.

4.2.7.2. Ratio Analysis

4.2.7.2.1. The study of relationships in a company's finances in order to understand and improve financial performances.

4.2.7.3. Ratios can be categorized in terms of the important types of financial performance and decisions in a business.

4.2.7.3.1. Liquidity Ratios

4.2.7.3.2. Asset Management Ratios

4.2.7.3.3. Debt Management Ratios

4.2.7.3.4. Profitability Ratios

4.2.7.3.5. Market Performance Ratios

4.2.8. Using Financial Ratios

4.2.8.1. Develop a Financial Analysis Plan

4.2.8.2. Sources of Comparative Information

4.3. Teacher Notes

4.3.1. 4.1 An owner’s claim on, or investment in, a business is the owners equity. This is also known as Stockholder’s Equity and as Net Worth. It is what’s left over after subtracting a business’s liabilities from its assets. For every change in assets there is an equal and corresponding change in liabilities and/or owner’s equity. One of the current problems facing our economy is that banks are required to list assets at the lower of cost or market value and market value is now much less than original value. Hence, banks have to write down their assets with a corresponding write down in owner’s equity. Most of the big banks have very little equity left.

4.3.2. 4.2 This section is about data integrity which normally would be rather boring but is highly relevant today due to the Bernie Madoff Ponzi scheme. Companies are required to publish annual reports and quarterly 10k statements if they have public stock ownership but it is always good to question the veracity of the numbers.

4.3.3. 4.3 Hopefully you are familiar with a balance sheet, an income statement, and a cash flow statement. All are vital in understanding how a business operates. Note that businesses obtain long term financing by issuing common stock (equity) or by issuing LT Bonds (debt).

4.3.4. 4.4 This is the ratio section. Liquidity ratios are most important to regular suppliers to see how a company pays its bills. Asset management ratios are important to investors and internal managers to see how efficient management is at utilizing their assets. Debt management ratios show how much leverage a company has, what its capacity is for more debt, and how likely they are to remain solvent. Profitability ratios measure returns for investors. Market performance ratios measure how investors value a company’s common stock. All are important for analyzing the financial condition of a company.

4.4. Teacher Overview

4.4.1. Maintain and Analyze Financial Records

4.4.1.1. Accounting Principles and Practices

4.4.1.1.1. Accounting is responsible for organizing a system of financial records, recording financial data, and preparing, analyzing, and interpreting financial statements.

4.4.1.1.2. Inaccurate, incomplete, or improperly prepared accounting records and statements misrepresent the financial condition of the business and mislead those who rely on the accountants' work.

4.4.1.2. Maintain and Use Financial Records

4.4.1.2.1. The components of an effective information system are users, data collection devices, data sharing devices, analysis/interpretation of information, and organization structures and processes.

4.4.1.2.2. Financial reports and other financial information are prepared by accountants and used to draw conclusions and make decisions that affect the financial future of the company.

4.4.1.3. Financial Management Analysis Tools

4.4.1.3.1. Financial management is responsible for asset management in a business. It determines the best mix of assets for a business, how to acquire them, and how to use them to get the best possible financial return from their use.

4.4.1.3.2. To make effective financial decisions, managers study the value of assets, liabilities, and Owen's equity, the revenues and expenses generated by the business, the company's stock position, and its use of earnings. They are concerned about the changes in the financial condition and position of the business over time, its current status, and projections for the future.

4.4.1.4. Financial Analysis and Decision Making

4.4.1.4.1. An important tool for analyzing financial statements is the financial ratio. Ratio analysis includes comparing relationships in current performance, making comparisons between current and past performances, and comparing the financial performance of the business with competitors' performances.

4.4.1.4.2. Ratios calculated from a company's financial statements can be used to examine current relationships among key financial elements. Comparing ratios over several time periods provides a better picture of the company's financial condition. Another use of ratios is to compare specific aspects of the company's financial condition and performance with that of similar businesses.

5. Chapter 7

5.1. Terms

5.2. Broad Topics

5.2.1. Financing Choices - 7.1

5.2.1.1. Short-Term Financing Activities

5.2.1.1.1. Buying On Account

5.2.1.1.2. Bank Loans and Notes

5.2.1.1.3. Commercial Paper

5.2.1.2. Long-Term Financing Choices

5.2.1.2.1. Using Debt and Equity

5.2.1.2.2. Leasing

5.2.2. Debt Financing - Bonds - 7.2

5.2.2.1. Types of Bonds

5.2.2.1.1. Government Bonds

5.2.2.1.2. Corporate Bonds

5.2.2.1.3. Global Company Bonds

5.2.2.2. Issuing Bonds

5.2.2.2.1. Investment Bankers

5.2.2.2.2. Interest Rates

5.2.2.2.3. Bond Ratings

5.2.3. Equity Financing - Stock - 7.3

5.2.3.1. Types of Stock

5.2.3.1.1. Common Stock

5.2.3.1.2. Preferred Stock

5.2.3.2. Issuing Stock

5.2.3.2.1. Initial Public Offering

5.2.4. Stock and Bond Markets - 7.4

5.2.4.1. Stock Market Transactions

5.2.4.1.1. Types of Stockbrokers

5.2.4.1.2. Stock Exchanges

5.2.4.1.3. Changing Stock Values

5.2.4.1.4. Stock Selection Actions

5.2.4.2. Mutual Funds

5.2.4.2.1. Types of Mutual Funds

5.2.4.2.2. Mutual Fund Values

5.2.4.3. Changing Bond Values

5.2.4.3.1. Reporting Bond Prices

5.2.4.3.2. Capital Gains

5.3. Teacher Notes

5.3.1. 7.1 When companies need money for a short period (less than a year) they usually borrow from a bank in the form of a line of credit or they sell commercial notes payable through investment bankers. The latter is confined to large, public companies. Companies also lease facilities and equipment. Companies in bad need of cash sometimes sell their buildings or capital assets and then lease them back.

5.3.2. 7.2 Long term debt financing is done through the sale of bonds. Bonds are promise to pay interest for a set period and then return the principal at the maturity date of the bond. The government finances its huge national debt by selling 10, 20 and 30 year bonds to US investors and to overseas governments like China and Japan. State and local governments finance public works through the sale of municipal bonds, the interest of which is not taxable to investors. Corporations issues debentures which may or may not be secured by specific assets. Rather than do it themselves state and local governments and corporations issue the bonds (and equity) through investment banks. In September 2008 there were 5 major I-Banks, now there are 2. The investment banker helps the issuer determine the coupon rate (how much interest the company has to pay) and gets the bonds rated by a ratings company. Bonds are usually issued in $1000 units but the actual price an investor pays depends on what the market interest rate is on the day they buy. If a bond is paying a 7% coupon when the market is only looking for 5% from an equal type of risk, the bond will sell for more than $1000. If it is paying a 5% coupon when the market wants 7%, the price will be below $1000. Thus, bond prices move inversely with interest rates. As interest rate rise, bond prices fall and as interest rates fall, bond prices rise. The coupon rate stays the same. The current yield an investor gets on the bond is the coupon rate/price of the bond.

5.3.3. 7.3 Most references to stock ownership are to Common Stock ownership. This is also called equity because stockholders own the business. They get a return on their investments through dividends the company pays as a percent of its profits and through capital gains if the value of their stock ownership increases. Again, companies use investment bankers to help issue stock. When stock is sold for the first time it is on the primary market. Afterwards all trading is done on the secondary market.

5.3.4. 7.4 The value of a stock is determined by what investors think will be future profitability of the firm. We saw in the ratios chapter that a firm with a high price/earnings ratio is valued more highly than on with a low P/E. When stock prices get very high some companies like to split their stock to make it more affordable to small investors. It really doesn’t matter overall whether you have one share at $100 or 2 shares at $50. Selling short involves borrowing stock from a broker, selling it, and buying it back later at a hopefully cheaper price. Its done when an investor thinks a stock is overvalued.

5.3.5. Bear in mind the reasons for selecting a stock investment on p 220-221. But, a great company does not necessarily mean a great stock investment. Its possible that the current price already reflects huge expectations from the company. If it doesn’t deliver, the price will fall. Microsoft is selling for less today (01/09) than in 1998. Apple is very highly valued today and better keep coming up with great new products or it too will falter. One way to diversify your investments is through a mutual fund which is basically giving your money to an investment manager and letting them buy a portfolio.

5.4. Teacher Overview

5.4.1. Finance Business Activities

5.4.1.1. Financing Choices

5.4.1.1.1. The main short-term financing methods used by businesses include buying on account (accounts payable), bank loan, line of credit, promissory note, and commercial paper.

5.4.1.1.2. Debt (borrowing), equity (selling stock), and leasing (renting) are methods used by organizations to finance business activities.

5.4.1.2. Debt Financing: Bonds

5.4.1.2.1. Bonds are issued by the federal government, state and local governments, foreign governments, and companies.

5.4.1.2.2. The process for issuing bonds involves the use of an investment banker, who provides advice to a company and helps set the price of the bonds. Rates on new bonds will be affected by current interest rates and the bond rating of the company.

5.4.1.3. Equity Financing: Stocks

5.4.1.3.1. The two main types of stock issued by corporations are common and preferred.

5.4.1.3.2. An initial public offering (IPO) is the buying and selling of stocks to outside investors for the first time. When this occurs, a company that was privately owned becomes a public compa

5.4.1.4. Stock and Bond Markets

5.4.1.4.1. A stockbroker is a licensed specialist in the buying and selling of stocks and bonds. Brokers work through stock exchanges, which are businesses that accommodate the buying and selling of securities. The main factors that affect stock prices are economic conditions, industry trends, and market trends.

5.4.1.4.2. A mutual fund is an investment fund set up and managed by companies that receive money from many investors. The money from investors is used to buy and sell a wide variety of stocks or bonds. Mutual funds allow investors to spread their risk among many investments. Many different types of mutual funds exist to meet different investment objectives.

5.4.1.4.3. Bond prices are affected by interest rates. Higher rates will result in a bond being sold at a discount. When rates decline, bonds are sold at a premium. A capital gain is the increase in value between the purchase price and the maturity value on a bond or other investment.

6. Chapter 8

6.1. Terms

6.2. Broad Topics

6.2.1. Financial Institutions and Banking Services - 8.1

6.2.1.1. Banking Systems

6.2.1.1.1. U.S. Banking History

6.2.1.1.2. The Federal Reserve System

6.2.1.1.3. Other Bank Regulatory Agencies

6.2.1.2. Financial Institutions in Action

6.2.1.2.1. Banking Departments

6.2.1.2.2. Forms of Financial Institutions

6.2.2. Financial Services - 8.2

6.2.2.1. Consumer Services

6.2.2.1.1. Electronic Banking

6.2.2.1.2. Savings Services

6.2.2.1.3. Payment Services

6.2.2.1.4. Lending Services

6.2.2.1.5. Other Financial Services

6.2.2.2. Commercial Banking

6.2.2.2.1. Cash Management

6.2.2.2.2. Business Loans

6.2.2.2.3. Business Assistance

6.2.3. International Banking - 8.3

6.2.3.1. Global Banking Activities

6.2.3.1.1. Early International Banking

6.2.3.1.2. International Trade and Banking

6.2.3.2. Global Financial Organizations

6.2.3.2.1. World Bank

6.2.3.2.2. International Monetary Fund

6.2.3.2.3. Organization for Economic Cooperation and Development

6.2.3.2.4. Regional Development Banks

6.3. Teacher Notes

6.3.1. 8.1 The Federal Reserve regulates our national banking system. They affect our economy by implementing Monetary Policy which involves massaging the discount rate (the interest rate banks charge each other for overnight loans); setting reserve requirements(how much of total deposits a bank must keep in capital) and regulating the money supply by buying and selling government bonds. The FDIC insures deposit accounts now up to $250,000 per depositor, not per account. Most banks offer the same services today but in the past they specialized a lot more. What they do today will be a lot different than what they will be allowed to do in the future. Regardless of how big your bank is, you may want to see its safety rating on bankrate.com. Many big banks today are technically insolvent.

6.3.2. 8.2 This section describes what banks do, which is just about everything financial. Most important today are free online banking and what minimum deposits are. Fees for overdrafts should also be considered if you have a tendency to do this.

6.3.3. 8.3 Be familiar with what the World Bank is and what the IMF does.

6.4. Teacher Overview

6.4.1. Financial Institutions and Banking Services

6.4.1.1. Banks and Other Financial Institutions

6.4.1.1.1. The First and Second Banks of the U.S. were early attempts to create a stable monetary system. Due to political differences, neither bank had its charter renewed when it expired. The Federal Reserve System was created to supervise and regulate member banks to help them serve the public efficiently. The Federal Deposit Insurance Corporation (FDIC) and the Comptroller of the Currency protect banking customers and regulate the activities of national banks.

6.4.1.1.2. The main departments of most banks are the loan department, personal banking, commercial banking, international banking, and the trust department. The two main types of financial intermediaries are depository and non-depository. In recent years, nearly all financial institutions have begun to offer a wider variety of financial services.

6.4.1.2. Financial Services

6.4.1.2.1. The main categories of financial services used by consumers are electronic banking, savings, payments, lending, and other services such as safe-deposit boxes, investment advice, and trust management.

6.4.1.2.2. Subtopic

6.4.1.3. International Banking

6.4.1.3.1. As early as 2000 BC, banking activities included accepting deposits, making loans, and coining money. Expanded global trade is accompanied by a growth of international banking. Banking activities in various geographic regions are affected by tradition and economic conditions.

6.4.1.3.2. The World Bank has the main function of providing economic assistance to less-developed countries. The International Monetary Fund promotes economic cooperation by maintaining an orderly system of international trade and exchange rates. Regional development banks exist to assist less-developed countries reduce poverty and expand economic activities.

7. Chapter 5

7.1. Terms

7.1.1. Cash Budget and Working Capital - 5.1

7.1.1.1. Cash Budget

7.1.1.1.1. An estimate of future cash receipts and cash payments for a specified period of time.

7.1.1.2. Working Capital

7.1.1.2.1. The difference between current assets and current liabilities.

7.1.1.3. Current Assets

7.1.1.3.1. Items of value in an organization that will likely be converted into cash within a year.

7.1.1.3.2. Commonly cash, accounts receivable, inventory, and other liquid assets.

7.1.1.3.3. Basis of day-to-day financial activities such as paying expense, collecting money from customers, and selling items to generate a profit.

7.1.1.4. Current Liabilities

7.1.1.4.1. Are amounts owed that need to be paid within the next year.

7.1.1.4.2. One of the most common current liabilities.

7.1.1.4.3. Items bought on credit by the company.

7.1.1.4.4. Any short-term debts of the organization, such as loans coming due or taxes owed.

7.1.1.5. Current Ratio

7.1.1.5.1. Is calculated by dividing current assets by current liabilities.

7.1.1.5.2. When this ratio is 1.0 or greater, the company has adequate current assets to cover debts coming due shortly.

7.1.1.5.3. If the current ratio is below 1.0, the company may not be able to pay upcoming bills on time.

7.1.1.6. Liquidity Ratio

7.1.1.6.1. Same as Current Ratio

7.1.2. Inventory Management - 5.2

7.1.2.1. Inventory

7.1.2.1.1. The merchandise an organization plans to sell to customers.

7.1.2.1.2. Sometimes called Mechanise inventory.

7.1.2.1.3. Part of a company's current assets.

7.1.2.1.4. Considered fairly liquid.

7.1.3. Payroll Management - 5.3

7.1.4. Credit Sales and Receivables - 5.4

7.2. Broad Topics

7.2.1. Cash Budget and Working Capital - 5.1

7.2.1.1. Cash Budget Process

7.2.1.1.1. An estimate of future cash receipts and cash payments for a specified period of time.

7.2.1.1.2. Benefits

7.2.1.1.3. Three main Sections

7.2.1.2. Cash Receipts

7.2.1.2.1. Cash Sales

7.2.1.2.2. Collections on Account

7.2.1.2.3. Other Cash Receipts

7.2.1.3. Cash Payments

7.2.1.3.1. Variable Cash Expenses

7.2.1.3.2. Fixed Cash Expenses

7.2.1.3.3. Other Cash Payments

7.2.1.4. Cash Excess or Shortage

7.2.1.4.1. When comparing expected cash receipts and cash payments, the result will be a cash excess or shortage.

7.2.1.4.2. An excess, when receipts exceed payments, may be deposited in a bank account or investment.

7.2.1.4.3. A cash shortage mush be covered by borrowing.

7.2.1.5. Cash Control Methods

7.2.1.5.1. Clear procedure for handling cash

7.2.1.5.2. System that divides responsibility among those who receive and those who deposit cash

7.2.1.5.3. Process that separates the preparation and approval of cash payments

7.2.1.5.4. Traditionally, companies used the principle of "deposit all cash received , and make all payments by check"

7.2.1.6. Working Capital

7.2.1.6.1. Elements of Working Capital

7.2.1.6.2. Managing Working Capital

7.2.2. Inventory Management - 5.2

7.2.2.1. Inventory Activities

7.2.2.1.1. Types of Inventory

7.2.2.2. Cost Management

7.2.2.2.1. Inventory Costs

7.2.2.2.2. Breakeven Analysis

7.2.3. Payroll Management - 5.3

7.2.3.1. Employee Pay Systems

7.2.3.1.1. Compensation

7.2.3.1.2. Types of Compensation

7.2.3.1.3. Compensation Methods

7.2.3.1.4. Employee Benefits

7.2.3.2. Payroll Activies

7.2.3.2.1. Payroll Preparation and Taxes

7.2.3.2.2. Payroll Payment Methods

7.2.4. Credit Sales and Receivables - 5.4

7.2.4.1. Credit Policy

7.2.4.1.1. Who will be granted credit?

7.2.4.1.2. What are the credit conditions?

7.2.4.1.3. Credit Terms

7.2.4.2. Receivable Management

7.2.4.2.1. Credit Management Activities

7.2.4.2.2. Debt Collection Procedures

7.3. Teacher Notes

7.3.1. 5.1 Even more so than individuals, it is critical how a company manages its cash flow. Suppliers and employees rely on the company having enough money to cover their obligations. A company plans its cash needs by totaling cash sales plus collections on previous credit sales and then subtracting the payments they have to make. If it looks tight or insufficient, they may have to get a bank loan or get more capital some other way. A quick way to get a rough idea on whether a company has enough liquid funds is to look at its working capital (Current Assets-Current Liabilities) and its current ratio (CA/CL). The latter should be about 1.7 or higher.

7.3.2. 5.2 A manufacturing company has inventory in three development stages, raw materials+ work in progress+ finished goods. A retailer will only have finished goods. The quicker a business can convert its inventory to cash, the better off it will be. This is inventory turnover (Sales/Inventory). When inventory doesn’t move fast enough it is usually discounted in price so it can be replaced with more profitable goods. Note the costs of inventory on p 151. The break-even analysis is important to know, but you have to separate your fixed costs and variable costs. Fixed costs are rent, insurance, probably utilities, and fixed salaries. Variable costs are materials and variable labor. If you have $50,000 in fixed costs and your gross profit per unit is $5 (Selling price- cost per unit) then you need to sell 10,000 units before you start to make a profit.

7.3.3. 5.3 Some people get salaries, some are paid on an hourly rate, some on a piece rate, and some on commission. Some are direct employees and other are independent contractors. Direct employees have their employers withhold some payroll taxes for social security, medicare, and federal taxes. Independent contractors have to pay for these items themselves. Always make sure you know how you are getting paid because the IRS wants its money and if your employer doesn’t pay then you have too.

7.3.4. 5.4 There are 5 C’s to obtaining Credit: Character, Capital, Collateral and Conditions. A business’s credit policy spells out rules for who can get, and keep, credit. Some companies extend a discount period to encourage customers to pay quickly. A 5/10/30 policy means a customer can take a 5% discount off the amount they owe if they pay within 10 days of the billing date otherwise the whole amount is due in 30 days. A business also has to decide how to enforce its credit policy-when to call and harass customers for payment. A customer who doesn’t pay results in the same as stolen goods. It takes a lot more sales to make up for the loss.

7.4. Teacher Overview

7.4.1. Short-Term Financial Activities

7.4.1.1. Cash Budget and Working Capital

7.4.1.1.1. A cash budget is prepared by (1) estimating cash receipts, (2) estimating cash payments, and (3) calculating the cash excess or shortage.

7.4.1.1.2. Working Capital is the difference between current assets and current liabilities. Current assets include cash, accounts receivable, and other liquid assets. Current liabilities are amounts to be paid in the next year.

7.4.1.2. Inventory Management

7.4.1.2.1. A manufacturing company will usually have three types of inventory items: direct materials, work in process, and finished goods. Inventory control methods can include a system of documentation, separate responsibilities, a regular physical inventory, and use of technology.

7.4.1.2.2. Common inventory costs include storage and tracking costs, insurance and taxes, and losses due to spoilage, damage, and theft. Production companies use a breakeven analysis to find the profit of products.

7.4.1.3. Payroll Management

7.4.1.3.1. Direct compensation includes wages, salary, commission, overtime, and bonuses. Indirect compensation includes payments made by an employer on behalf of an employee for items such as insurance, pension funds, and educational expenses.

7.4.1.3.2. Common payroll deductions include federal, state, and city income tax; Social Security and Medicare taxes; and voluntary deductions for items such as health or life insurance, savings, deposits to retirement funds, charitable donations, and union dues.

7.4.1.4. Credit Sales and Receivables

7.4.1.4.1. Credit is granted to customers on the basis of (1) capacity, the ability of the borrower to repay money owed; (2) collateral, a specific asset used to secure a loan; and (3) the past credit history of the borrower. Credit terms are the conditions under which credit is extended by a lender to a borrower. These terms clearly communicate if the buyer or the seller will pay delivery charges, penalties or interest for late payments, and discounts for early payments.

7.4.1.4.2. Credit managers use aging of accounts receivable to manage past due accounts. Debt collection procedures are used to reduce the uncollectible accounts of a company.

8. Chapter 6

8.1. Terms

8.1.1. Capital Projects - 6.1

8.1.2. Capital Budgeting Process - 6.2

8.1.3. Capital Project Analysis - 6.3

8.1.4. Business Expansion Strategies - 6.4

8.2. Broad Topics

8.2.1. Capital Projects - 6.1

8.2.1.1. Capital Project

8.2.1.1.1. 5 main types of capital projects

8.2.1.1.2. Project Selection Factors

8.2.2. Capital Budgeting Process - 6.2

8.2.2.1. Making Capital Decisions

8.2.2.1.1. Capital Budgeting

8.2.2.2. Cost of Capital

8.2.2.2.1. Cost of Debt

8.2.2.2.2. Cost of Equity

8.2.2.2.3. Optimal Capital Structure

8.2.2.2.4. Weighted Average Cost of Capital ( WACC )

8.2.3. Capital Project Analysis - 6.3

8.2.3.1. Capital Decision Tools

8.2.3.1.1. Payback Method

8.2.3.1.2. Net Present Value

8.2.3.1.3. Calculate Net Present Value

8.2.3.1.4. Internal Rate of Return

8.2.3.2. Additional Analysis Factors

8.2.3.2.1. Opportunity Costs

8.2.3.2.2. Sunk Cost

8.2.3.2.3. Risk Analysis

8.2.4. Business Expansion Strategies - 6.4

8.2.4.1. Business Growth Actions

8.2.4.1.1. Organizational Strategies

8.2.4.1.2. Expansion Methods

8.2.4.1.3. Product Variations

8.2.4.1.4. Diversity of Markets

8.2.4.2. Reducing Global Risks

8.2.4.2.1. Conduct Business In Several Regions

8.2.4.2.2. Diversify Product Lines

8.2.4.2.3. Involve Local Ownership

8.2.4.2.4. Employ Local Management

8.3. Teacher Notes

8.3.1. 6.1 Companies engage in capital spending projects to insure there long-term viability. Without growth, competitors will drive them out of business. Typical decisions include replace or repair, entering new markets, new products, etc. Some projects are mutually exclusive meaning you can do one or the other but not both.

8.3.2. 6.2 Companies have a limited amount of funds to invest so they have to rank capital spending projects. First they focus on company goals, figure out appropriate projects, forecast future cash flows from these projects and discount the cash flows into a present value figure. Actual cash receipts and disbursements are important so depreciation is ignored except in determining salvage values. Also important is the discount rate used to determine the present value of future cash flows. The discount rate used, aka the required rate of return, is based on the companys’s cost of capital. How much does it cost the company to raise the required funds? There is a cost of debt (borrowing through bond sales) which is interest. There is also a cost of equity which is the rate of return required by stockholders (equity owners). Usually debt has a lower cost of capital because the interest expense is tax deductible. The weighted average cost of capital is simply the % of debt the company has in its capital structure times the debt cost of capital plus the % of equity in the structure times the equity cost of capital.

8.3.3. 6.3 Companies use decision criteria called payback period, net present value, or internal rate of return. The payback is easiest but doesn’t consider the time value of money. The internal rate of return is easy to understand but doesn’t tell anything about the increase in value of the firm. The net present value is the best for ranking projects. Make sure you study this section closely.

8.3.4. 6.4 Businesses can be organized in a centralized manner where power is focused in a tight management structure, a decentralized manner where decision-making is spread out . Businesses can grow vertically (buying suppliers or key customers) or horizontally (buying competitors or like businesses). The more diversity a company has in its operations and locations, the less likely they will be hurt by major disruptions.

8.4. Teacher Overview

8.4.1. Long-Term Financial Activities

8.4.1.1. Capital Projects

8.4.1.1.1. Capital spending refers to construction or purchase of long-term assets, such as buildings and equipment. The main types of capital projects are replacement projects, cost-saving projects, new products or markets, government-required projects, and social benefit projects.

8.4.1.1.2. Independent projects are not affected by other projects. Mutually exclusive projects involve situations in which the acceptance of one project does not allow acceptance of others. Complementary projects exist when two or more projects are dependent on one another.

8.4.1.2. Capital Budgeting Process

8.4.1.2.1. The five steps of the capital budgeting process are (1) set capital spending goals, (2) determine potential projects, (3) forecast cash flows, (4) identify the cost of capital, and (5) select and implement the project.

8.4.1.2.2. Cost of capital has two elements. The cost of debt is the rate of return required by creditors. The cost of equity is the required return of the owners in a company. The optimal capital structure is the financing combination with a low cost of capital and maximum market value.

8.4.1.3. Capital Project Analysis

8.4.1.3.1. Three main capital budgeting decision methods are commonly used: (1) the payback method, (2) net present value (NPV), and (3) internal rate of return (IRR).

8.4.1.3.2. Sunk costs are expenses that have been incurred and cannot be recovered. The risks of a capital project are commonly created by geography, economic conditions, social and cultural factors, and political and legal restrictions.

8.4.1.4. Business Expansion Strategies

8.4.1.4.1. In centralized organizations, decisions are made at company headquarters. A decentralized organization allows business decisions to be made at lower levels of the organization. Horizontal integration is a merger between two or more companies in the same type of business. With vertical integration, a company expands through increased involvement in different stages of production and distribution.

8.4.1.4.2. Reducing global business risk may be achieved by conducting business in several regions, having a diverse product line, involving local owners, and employing local management.

9. Chapter 9

9.1. Terms

9.2. Broad Topics

9.2.1. Credit Principle and Practices - 9.1

9.2.1.1. Credit Basics

9.2.1.1.1. Types of Credit and Credit Terms

9.2.1.1.2. The Credit Decision

9.2.1.2. Planning to Offer Credit

9.2.1.2.1. Importance of Consumer and Business Credit

9.2.1.2.2. Alternatives for Offering Credit

9.2.2. Offer and Use Credit - 9.2

9.2.2.1. Developing Effective Credit Policies

9.2.2.1.1. Costs of Offering Credit

9.2.2.1.2. Credit Policy Decisions

9.2.2.1.3. Making Credit Decisions

9.2.2.2. Deciding to Use Credit

9.2.2.2.1. Types of Business Credit

9.2.2.2.2. Determining the Cost of Credit

9.2.3. Collection Procedures and Legal Requirements - 9.3

9.2.3.1. Establishing Collection Procedures

9.2.3.1.1. Select Customers

9.2.3.1.2. Maintain Records

9.2.3.1.3. Invoice Purchases

9.2.3.1.4. Monitor Accounts

9.2.3.1.5. Take Action

9.2.3.1.6. Use Customer-Friendly Strategies

9.2.3.1.7. Escalate Collection Contacts

9.2.3.1.8. Take Final Steps

9.2.3.2. Credit Law

9.2.3.2.1. The Truth In Lending Act

9.2.3.2.2. Equal Credit Opportunity Act

9.2.3.2.3. The Fair Credit Reporting Act

9.2.3.2.4. The Fair Credit Billing Act

9.2.3.2.5. The Fair Debt Collection Practices Act

9.2.3.2.6. Right To Financial Privacy Act

9.2.3.2.7. The Financial Modernization Act

9.3. Teacher Notes

9.3.1. 9.1 Like individuals with consumer credit, most businesses rely on some type of trade credit from their suppliers and from banks. However, in our current economy (02/09) while the theory remains the same the implementation of credit policy has become highly restricted. Not all businesses have their own plans. Some contract out the collecting process by selling their receivables at a discount. This is known as factoring.

9.3.2. 9.2 How and when to offer credit to customers is up to the business. Generally, the more lenient the credit policy, the higher the sales for the firm. The 4 C’s of credit will apply however today there are grave concerns over capacity and conditions which have changed quickly and dramatically. Businesses have credit scores just like individuals. Note the factors on p 277. Businesses can fiance themselves by extending payment to there suppliers, obtaining a short-term line of credit with a bank or finance company, by factoring its receivables, or by selling short-term notes payable called commercial paper. Note that if you are offered a discount by a supplier there is a cost in NOT taking it. See p 280 for an example of how to calculate the annual rate of this cost.

9.3.3. 9.3 For a business which sells to its customers on a credit basis, an effective collections policy is imperative. Otherwise you will go broke quickly. There is an 8 step process on p 283 to setting up a credit and collections policy. If you normally operate on a 5% net profit margin and somebody rips you off for $100 of goods they don’t pay for, you have to sell $2000 of more goods to make up for it. Credit laws are mostly designed to protect buyers so businesses must be aware of them if they offer credit.

9.4. Teacher Overview

9.4.1. Consumer Credit

9.4.1.1. Credit Principles and Practices

9.4.1.1.1. Many business-to-business sales as well as sales to final consumers are made using credit. Deciding to extend credit to customers or use credit when making purchases should be viewed primarily as a financial decision.

9.4.1.1.2. Choosing which customers will be eligible for credit involves financial and legal criteria. When using credit to finance purchases, the primary financial considerations of a company are interest costs that increase the final price of the purchase, whether a lower price is available for paying cash, and the effect on cash flow at the time payment must be made.

9.4.1.2. Offer and Use Credit

9.4.1.2.1. The credit policies of a business are an important factor in determining the percentage of sales that will initially be classified as accounts receivable, how long sales will remain in that account, and ultimately how much of accounts receivable is converted to cash when credit customers pay their accounts.

9.4.1.2.2. There are several sources of credit available to businesses and several types of credit from those sources. Businesses can look to their suppliers, banks, and other financial organizations or they can issue their own commercial paper. A company must balance the cost of obtaining credit against the value received from the use of the money.

9.4.1.3. Collection Procedures and Legal Requirements

9.4.1.3.1. One of the greatest costs to a company that operates a self-managed credit system is losses from unpaid accounts. Businesses must develop collection procedures that keep customer credit payments up to date and eliminate charge-offs.

9.4.1.3.2. To regulate credit transactions and protect the rights of both lenders and borrowers, a number of federal laws have been enacted. Laws have been developed that regulate offering credit, collecting accounts, providing credit information, and protecting the privacy and security of customers' information.

10. Chapter 10

10.1. Terms

10.2. Broad Topics

10.2.1. Manage Risk - 10.1

10.2.1.1. Facing Risks

10.2.1.1.1. The Meaning of Risk

10.2.1.1.2. Types of Risk

10.2.1.2. Managing Risk

10.2.1.2.1. Risk Management Programs

10.2.1.2.2. Dealing With Risk

10.2.2. Principles of Insurance - 10.2

10.2.2.1. Insurance Basics

10.2.2.1.1. Insurance Terms

10.2.2.1.2. What Can be Insured

10.2.2.2. Insurance Companies

10.2.2.2.1. Ownership Structures

10.2.2.2.2. Insurance Operations

10.2.2.3. The Insurance Policy

10.2.2.3.1. Common Parts of a Policy

10.2.3. Property and Vehicle Insurance - 10.3

10.2.3.1. Insuring Property Risks

10.2.3.1.1. Comprehensive Property Insurance

10.2.3.1.2. Business Owners Policy

10.2.3.1.3. Title Insurance

10.2.3.1.4. Transportation Insurance

10.2.3.1.5. Credit Insurance

10.2.3.1.6. Crime Insurance

10.2.3.2. Vehicle Insurance

10.2.4. Personnel and Liability Insurance - 10.4

10.2.4.1. Providing Personnel Protection

10.2.4.1.1. Requiring Insurance Benefits

10.2.4.1.2. Employee Health Insurance

10.2.4.1.3. Life Insurance

10.2.4.1.4. Retirement Plans and Pensions

10.2.4.2. The Need for Liability Insurance

10.2.4.2.1. Managing Liability Risks

10.2.4.2.2. Types of Liability insurance

10.3. Teacher Notes

10.3.1. 10.1 Risk is the probability of loss. There is financial risk, speculative risk, life risk, natural risks, as well as potential losses in other areas. Some risks can be managed with risk management programs and insurance. Insurance is really a way to transfer risk to others for a cost. The greater the probability of loss, the greater the cost.

10.3.2. 10.2 Insurance companies will accept the transfer of risk if they can pool the risk with a large number of similar risks so that the probability of a major loss becomes minimal and predictable. Actuaries are people who crunch the numbers to determine probabilities and potential losses. There must be an identifiable peril to insure against with potential losses of a measurable amount. To guard against super large losses insurance companies will themselves buy insurance to spread the risk. This is reinsurance. Insurance companies are either owned by stockholders who expect dividends from profits or they can be mutual companies owned by the members or policy holders who expect lower costs and rates. Insurance companies can sell policies through their own agents, who are franchisees, or through independent agents. State Farm and Allstate are examples of franchise agents. When they submit an application for insurance coverage the insurance company decides whether to accept it (underwrite it) and what rate to charge. The actual policies usually have a deductible where the policyholder assumes some of the risk along with specific conditions which are exclude from insurance. Most homes are not covered for flood. This insurance must be purchased from the federal government.

10.3.3. 10.3 A Commercial Package Policy guards against risk of loss from perils listed on p 313. Additional coverage can be purchased to cover loss of profits. Title insurance protects a purchaser against claims of ownership by others; shipping or transportation insurance to cover goods in transit; credit insurance to guard against loss from bad accounts receivable. Vehicle insurance is what most people are familiar with. The types of coverage are listed on p. 317.

10.3.4. Other types of insurance are Social Security, Unemployment Insurance,Workers Compensation to protect against an injury on the job; health insurance, dental, long-term care, deposit insurance and, of course life insurance. Life insurance has many variations but essentially is either term or whole life. Term life insurance is protection against loss of life within a specified time period. All the policy holder gets for their premium is life protection. Whole life contains protection against loss of life and a savings account with a deferred tax element. Liability insurance is protection against the possibility that you are held liable in a criminal or civil context from accident or negligence.

10.4. Teacher Overview

10.4.1. Business Insurance

10.4.1.1. Manage Risk

10.4.1.1.1. Risk is the change of probability of harm or loss. Individuals face risks that can affect health, income, property, and can even result in death. Businesses face risks that can have a significant economic effect.

10.4.1.1.2. Natural risks arise from natural events or are a part of nature. Human risks result from the actions of individuals, groups, or organizations. Risks can be avoided, transferred, insured, or assumed.

10.4.1.2. Principles of Insurance

10.4.1.2.1. Insurance is based on three principles. (1) Some risk facing an individual or organization is transferred to others. (2) Risks are pooled or shared among a large group of individuals or companies. (3) Risk for any one individual or business is reduced by controlling the uncertainty of the loss.

10.4.1.2.2. Insurance companies can be stock companies or mutual companies. Their major activities are rate making, selling, underwriting, investing, and claims processing. An insurance policy is a legal contract between the insurer and the insured. A standard insurance policy contains declarations, the insuring agreement, conditions, and exclusions.

10.4.1.3. Property and Vehicle Insurance

10.4.1.3.1. Property risks to businesses can be identified and insurance is available to provide protection against those risks. The common types of property insurance are comprehensive property, business owners, title, transportation, credit, and crime.

10.4.1.3.2. Automobile insurance policies are similar for insurance purchased by individuals and businesses. Policies covering business vehicles are called commercial vehicle insurance or business auto coverage.

10.4.1.4. Personnel and Liability Insurance

10.4.1.4.1. The federal government requires businesses to provide Social Security, unemployment, and workers' compensation insurance. Two common types of health insurance plans are fee-for-service and managed care. Life insurance pays a beneficiary upon the death of the insured. Employers offer retirement and pension plans to employees to aid long-term financial planning.

10.4.1.4.2. Companies must be proactive in managing liability risks. They can purchase liability insurance that provides coverage for the areas and activities where the business has liability exposure. Commercial general liability insurance provides broad coverage to people and property. An umbrella policy provides coverage beyond other policies.

11. Formulas

12. Chapter 11

12.1. Terms

12.2. Broad Topics

12.2.1. Financial Information Management - 11.1

12.2.1.1. Changes in Financial Information Management

12.2.1.1.1. Electronic Information

12.2.1.1.2. The Use of Technology

12.2.1.2. Financial Information

12.2.1.2.1. Managing Financial Information

12.2.1.2.2. Making Decisions

12.2.1.2.3. Sharing Information

12.2.2. Technology In Finance - 11.2

12.2.2.1. A Focus on Technology

12.2.2.1.1. Making Technology Decisions

12.2.2.2. Technology Applications in the Finance Industry

12.2.2.2.1. Technology and Banking

12.2.2.2.2. Technology and Investing

12.2.2.2.3. Technology and Insurance

12.2.2.2.4. The Effects of Technology on Consumers

12.2.3. Information Privacy And Security - 11.3

12.2.3.1. Business Responsibility for Private Information

12.2.3.1.1. Maintaining Data Integrity

12.2.3.1.2. Legal Responsibilities of Financial Businesses

12.2.3.1.3. Information Security Procedures

12.2.3.2. Consumer Privacy and Security

12.2.3.2.1. Types of Online Security Risks

12.2.3.2.2. Steps to Reduce Security Risks

12.3. Teacher Notes

12.4. Teacher Overview

12.4.1. Financial Information Management

12.4.1.1. Finance is an information industry. Consumers buy information when they purchase financial products. They expect a great deal of timely and accurate information to help them make purchasing decisions and manage their financial resources.

12.4.1.2. Within financial services companies, a specialized financial information system is required. The system allows an organization to obtain needed financial information and use that information in decision making.

12.4.2. Technology in Finance

12.4.2.1. When businesses plan for the adoption of technology, they make decisions about the types of technology to adopt, how the technology will be used, and the time-line for implementing the technology. Final decisions are made using a cost/benefit analysis.

12.4.2.2. All parts of the financial services industry are affected by technology. Large customer databases and more product information demand that companies use technology to provide quick access to information and faster services with accuracy and security.

12.4.3. Information Privacy and Security

12.4.3.1. As more personal information is collected, stored on computers, and shared, the risk of lost or stolen data increase. Financial businesses are legally required to protect the privacy of the consumer information they collect.

12.4.3.2. Online fraud is used to steal consumer identities and personal information and to hijack customer financial accounts. Online fraud occurs through phishing, pharming, and pretexting.

13. Chapter 12

13.1. Teacher Overview

13.2. Broad Topics

13.2.1. International Business And Trade - 12.1

13.2.1.1. Foreign Trade Activities

13.2.1.1.1. Absolute Advantage

13.2.1.1.2. Comparative Advantage

13.2.1.1.3. Importing

13.2.1.1.4. Exporting

13.2.1.1.5. Trade Barriers

13.2.1.2. Encouraging and Measuring Trade

13.2.1.2.1. Actions to Encourage Trade

13.2.1.2.2. Trade Measurements

13.2.2. Economic Development and Monetary Systems - 12.2

13.2.2.1. Economic Development

13.2.2.1.1. Economic Development Factors

13.2.2.1.2. Types of Infrastructure

13.2.2.1.3. Levels of Economic Development

13.2.2.2. International Currency

13.2.2.2.1. Foreign Exchange Rates

13.2.2.2.2. Factors Affecting Currency Values

13.2.2.2.3. Foreign Exchange Controls

13.2.3. International Financial Markets - 12.3

13.2.3.1. Global Security Markets

13.2.3.1.1. International Stock Exchanges

13.2.3.1.2. The Over-The-Counter Market

13.2.3.1.3. Global Bond Markets

13.2.3.2. Other International Financial Markets

13.2.3.2.1. Foreign Exchange Market

13.2.3.2.2. Futures Market

13.2.3.2.3. Options Market

13.2.4. Global Payments and Financial Risk - 12.4

13.2.4.1. International Payments and Financial Documents

13.2.4.1.1. Cash in Advance

13.2.4.1.2. Letter of Credit

13.2.4.1.3. Sale of Account

13.2.4.1.4. Other Global Financial Documents

13.2.4.2. International Financial Agencies

13.2.4.2.1. Export-Import Bank

13.2.4.2.2. Overseas Private Investment Corporation

13.2.4.2.3. Foreign Credit Insurance Association

13.3. Teacher Notes

13.3.1. International Business and Trade

13.3.1.1. A country that can produce a good or service at a lower cost has an absolute advantage. A comparative advantage exists when a country produces a good or service at which it is more efficient. Items bought from other countries are imports. Items sold to other countries are exports. Some formal trade barriers are quotas, tariffs, and embargoes.

13.3.1.2. Free-trade zones, free-trade agreements, common markets, and regional trade organizations encourage international trade. The difference between a country's total exports and total imports is its balance of trade. Balance of payments is the difference between the amount of money that comes into a country and the amount that goes out.

13.3.2. Economic Development and Monetary Systems

13.3.2.1. An industrialized country has strong business activity resulting from advanced technology and a highly educated population. A less developed country (LDC) has little economic wealth and an emphasis on agriculture or mining. Developing countries are attempting to evolve from less developed to industrialized.

13.3.2.2. The value of a country's currency is affected by the nation's balance of payments, economic conditions, and political stability.

13.3.3. International Financial Markets

13.3.3.1. The World Federation of Exchanges coordinates financial markets and stock exchanges around the world. International mutual funds allow investors to buy stock in companies around the world. The global bond market is used to issue and trade debt securities.

13.3.3.2. Floating exchange rates are set in the foreign exchange market. The futures market allows investors and others to buy or sell contracts on the future prices of commodities, metals, and financial instruments.

13.3.4. Global Payments and Financial Risk

13.3.4.1. Three types of payment methods are used for international transactions: cash in advance, letter of credit, and sale on account. Other global financial documents include promissory notes, bills of exchange, electronic funds transfer, commercial invoices, and proof of insurance.

13.3.4.2. The Export-Import Bank of the United States (EXIM) helps finance the export of U.S. products. The Overseas Private Investment Corporation (OPIC) provides investment insurance to U.S. companies that establish operations in developing countries. Credit risk insurance is available through the Foreign Credit Insurance Association (FCIA).

13.4. Terms

14. Final Exam Hints

14.1. The SEC requires public companies to filed a detailed statement on an annual basis called a

14.1.1. ___Form 10K_____

14.2. What is the primary difference between a bank and credit union

14.2.1. __"User-owned Not-for-profit Cooperative financial institution Commonly formed by people in the same organization Serving members only, accept savings deposits and make loans for a variety of purposes. "______

14.3. What is the most accepted method of evaluating capital

14.3.1. projects__Net Present Value______

14.4. Know what the definition of Comparative Advantage is (new chapter material) -

14.4.1. The situation, in which a country specializes in the production of a good or service at which it is relative more efficient.

14.5. What is the major financial disadvantage to ownership of a corporation

14.5.1. __Profits sometimes double tax. First to the corp and then to as divided to stockholders____

14.6. Know the 4 C's of credit

14.6.1. __Character , Capacity , Collateral (Capital) , Conditions __

14.7. What would likely increase the value of a country's currency

14.7.1. __Balance of Payments , Economic Conditions , Political Stability____

14.8. The answer to the question about recent world events have caused many conservative economists a great deal of anger because of the violation of the tenents of free enterprise, this tenent is:

14.8.1. Limited Government Role in the Economy

14.9. A problem using the Dividend yield calculation

14.9.1. Dividend Yield pg. 220 Dividend Yield = Dividend per share / Market price per share $2.40 / $40 = 0.06 or 6%

14.10. What does the study of economics help determine______

14.10.1. The science of decision making about the allocation of scarce resources.

14.11. Know what the balance sheet, income statement and cash flow statement mean

14.11.1. Balance Sheet Known as the statement of financial position, identifies the assets, liabilities, and equity of a business as of a specific date. a specific date. Describes what the company owns, what it owes, and its value to the owners. Organized around the basic accounting equation Assets = Liabilities + Owners Equity

14.11.2. Income Statement Provides a view of the financial changes in a business that have occurred during a specified period of time. specified period of time. It documents all income and expenses during that period and the resulting profit or loss earned. Just like a balance sheet, an income statement needs to be prepared at least once a year but is usually prepared very frequently, often once a month. Profit or loss calculated on a income statement The value of a country's currency in relation to the value of the money of another country. Usually before taxes is calculated followed by subtracting the amount of taxes paid. The result is the business' net income or loss for the period

14.11.3. Cash Flow Statement Prepared to show how cash is used by a business during a specified time period. Neither the balance sheets nor the income statements disclose all of the important financial information needed to understand a company's financial strengths or weaknesses. Financial data reported on both statements does not necessarily reflect the actual cash received and spent by the business during the time period represented. A lack of cash may mean that too much credit is being extended to customers or the company has too many current liabilities. Separates cash flows into categories of Cash receipts cash sales, payments received from customers, interest received, and owners investments. Cash payments Creditors, payments of salaries, utilities and taxes, and cash purchases or equipment and supplies.

14.12. Question on international trade (new material)

14.13. Question on what is issued by a bank on behalf of an importer to guarantee payment (new material)