Notesale: Turn your study into money

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4) Business Ownership

- Sole proprietorship: business that is owned (&usually operated) by one person
• ( + ) ease of startup & closure, pride of ownership, retention of all profits, no
special taxes, flexibility of being own boss

• ( - ) unlimited liability, lack of continuity, lack of money, limited management
skills, difficulty hiring

- Partnership: voluntary association of 2+ persons to act as co owners of a
business for profit

• general partner: person who assumes full on shared responsibility for
operating a business

• limited partner: person who invests money in a business but has no
management responsibility or liability for losses beyond the initial investment

- master limited partnership (MLP)/ publicly traded partnership (PTP):

limited partnership w units of ownership that can be traded on security
exchanges like shares of ownership

• articles of partnership: an agreement listing and explaining terms of the
partnership

• ( + ) ease of start up, availability of capital&credit, personal interest,
combines business skills&knowledge, retention of profits, no special taxes

• ( - ) unlimited liability, management disagreements, lack of continuity, frozen
investment

- Corporation: artificial person created by law w most of the legal rights of people
(start&operate a buis, buy/sell property, borrow money, sue/be sued, enter into
binding contracts)

• stock: shares of ownership of a corporation
- common stock: owned by individuals/firms who may vote on corporate
matters but whose claims on profits&assets are subordinate to claims
of others

- preferred stock: owned by individuals/firms who usually don't have voting
rights but whose claims on dividends are paid before those of common
stock

- dividend: dist of earnings to stockholders
- proxy: legal form listing issues to be decided at a stockholder’s meeting
& enabling stockholders to transfer their voting rights to other individuals

• closed corporation: stock owned by relatively few people & not sold to
general public

• open corporation: stock can be bought&sold by any individual
• domestic corporation: in the state in which it is incorporated
• foreign corporation: in any state in which it does business expect the one in
which it's incorporated

• alien corporation: chartered by a foreign gov & conducting business in the
US

• ( + ) limited liability (each owner’s liability is amt they paid for corp’s stock),
ease of raising capital, ease of transfer of ownership, perpetual life,
specialized management

• ( - ) difficulty & expense of formation, gov regulation & licensed paperwork,
conflict within, double taxation, lack secrecy

- corporate structure: stockholders (owners) > elect board of directors > appoint
officers > hire employees

• board of directors: top governing body of a corp, members elected by
stockholders

• corporate officers: chairman of the board, president, executive vice pres,
corporate secretary, treasurer, and any other top executive

- special buis ownership types

• S-corporation: taxed as though a partnership
• limited liability company (LLC): combines benefits of corp&partnership while
avoiding some restrictions&disadvantages

• non profit corporation: provide a social, educational, religious, etc service
rather than earn profit

- cooperative: association of individuals/firms whose purpose is to perform some
business func for its members

- joint venture: agreement between 2+ groups to form a business entity in order to
achieve a specific goal or to operate for a specific per of time

- syndicate: temporary association of individuals or firms organized to perform a
specific task that requires a large ant of capital

- merger: purchase of one corporation by another
• acquisition: large corporation’s purchase of other corporations
• hostile takeover: management & board of directors of a firm targeted for
acquisition disapprove of the merger

- tender offer: offer to purchase stock of acquisition targeted firm at
price just high enough to tempt stockholders to sell their shares

- proxy fight: gather enough stockholder votes to control a targeted
company

• horizontal merger: between firms that make/sell similar prod/services in
similar markets

• vertical merger: between firms that operate at diff but related levels in
production & marketing of a prod

• conglomerate merger: between firms in completely diff industries

- selection: process of gathering info about applicants for a position then using
that info to choose the most appropriate (apps, tests, interviews, references,
assessment)

• resume: 1-2 page summary of candidate's background&qualifications
• structured interview: interviewer asks only a prepared set of job related Q

- orientation: process of acquainting new employees w an organization
- employee training: teaching operations&technical employees how to do their
present jobs more effectively&efficiently

• supersales trainer: full time trainer that provides production, sales, &
employee development training

- management development: process of preparing managers & other
professionals to assume increased responsibility in both present & future
positions

- compensation: payment employees receive in return for their labor
• compensation system: policies&strategies that determine employee comp
- wage survey: collection of data on prevailing wage rates w/in an
industry/geographic area

- wage structure: set of decisions on relative pay levels for all positions
• job evaluation: process of determining the relative worth of various
jobs w/in firm

• comparable worth: seeks equal compensation for jobs requiring about same
lvl edu, training, & skills

• hourly wage: specific amt of money paid for each hour of work; salary:
specific ant paid for each hour of work; commission: payment in percentage
of sales revenue

9) Best Employees

- Human Resources Management (HRM): all the activities involved in acquiring
(human resources planning, job analysis, recruiting, selection, orientation),
maintaining (employee relations, compensation, benefits), and developing
(training&development, performance appraisal) an organization’s human
resources

- human resources planing: development or strategies to meet a firm’s future

• incentive payment: in addition to wages, salary, or commissions
- gain sharing: incentives to employees who exceed specific sales or prod
goals; merit pay: reward outstanding workers

• lump salary increases: an entire pay raise taken in one lump sum
• profit sharing: dist of a perfecta or firm's profit among its employees

- employee benefit: reward in addition to regular compensation that is provided
indirectly to employees (pay for time not worked, insurance packages,

human resources needs; organization’s overall strategic plan, forecast future

pension&retirement programs, worker's compensation insurance, unemployment

demand, determined resources avail, match supply w demand

insurance, Social Security, etc)

• replacement chart: list of key personnel & their possible replacements
• skills inventory: computerized data bank containing info on skills and exp of
all present employees

• laid off: dismissed from workforce until needed again
• attrition: normal reduction in the workforce occurs when employees leave
• early retirement: people w/in few years of retirement permitted to retire early
w full benefits

• fired: last resort to rid unnecessary employees
- cultural (workplace) diversity: differences among people in a workforce in race,
ethnicity, & gender

- job analysis: systematic procedure for studying jobs to determine their various
elements&requirements

• job description: list of elements that make up a particular job; job
specification: list of qualifications required to perform a job

- recruiting: process of attracting qualified job applicants
• external: outside an org
• internal: considering present employees as applicants
- promotion, transfer (same level), job posting: informing current
employees of upcoming openings

• flexible benefit plan: compensation plan whereby an employee receives a
predetermined amt of benefit dollars to spend on a package of benefits
selected to meet individual needs

- performance appraisal: eval of employee’s current & potential lvls of
performance to allow managers to make objective human resources decisions

• objective: use some measurable quantity (units of output, dollar vol of sales)
• judgmental: based on employee ranking or rating scales
- rating scale: statements given a rating
• performance feedback interview: results of appraisal discussed w employee
after eval completed

- tell&sell: superior tells employee how good/bad performance has been
& persuades employee to accept; tell&listen: supervisor tells employee
what has been right/wrong w performance & gives opportunity to react;
problem solving: employees eval their own performances & set their own
future goals

• 360degree evaluation: collects anon reviews about an employee from peers,
subordinates, & supervisors and then compiles reviews into feedback report
given to employee

- National Labor Relations Act and Labor Management Relations Act: concerned
w dealings between business firms & labor unions

-

Fair Labor Standards Act: est minimum wage & overtime pay rate

- Theory Z: by William Ouchi; belief that some middle group between types A&J

• problem solving: knowledgable employees brought together to tackle a

Equal Pay Act: men&women doing equal jobs must be paid same wage

practices is best for American businesses; emphasis on participative decision

specific problem; self managed: groups of employees w authority&skills to

Civil Rights Acts: prohibits discrimination

making (“we” rather than “us versus them”)

manage themselves; cross functional: individuals w varying specialties,

Age Discrimination in Employment Act: eliminated mandatory retirement age

• type J firms (Japanese): lifetime employment, collective responsibility &

Occupational Safety and Health Act: regulates degree of exposure to hazardous
substances & specifies safety equipment provided

expertise, &skills that are brought together to achieve a common task;

decision making, slow promotion, implied control mechanisms,
nonspecialized career paths, and holistic concern for employees

- Employee Retirement Income Security Act: regulates company retirement

• type A firms (American): short term employment, individual responsibility &

programs and provides fed insurance program for retirement

- Affirmative Action: hire qualified employees from minority groups
- Americans with Disabilities Act (ADA): prohibits discrimination against qualified
individuals w disabilities in all employment practices

- Motivation: individual internal process that energizes, directs and sustains
behavior; the personal “force” that causes one to behave in a particular way

- Morale: employee’s feelings about their job and superiors about the firm itself;
high morale results mainly from the satisfaction of needs on the job (to be
recognized) or as a result of the job (financial security)

- scientific management: the application of scientific principles to management of
work and workers; by Frederick Taylor

• piece rate system: compensation system where employees are paid a
certain amount for each unit of output they produce (Taylor’s idea people
worked only to earn money)

- Hawthorne studies: human factors are responsible for productivity (sense of
involvement and social acceptance)

• human relations movement: employees who are happy and satisfied with
their work are motivated to perform better

- Maslow’s hierarchy of needs: a sequence of humans needs in the order of their
importance; by Abraham Maslow

• need: a personal requirement
• physiological: things we require for survival > safety: physical and emotional

electronically

• forming, storming (goals&objectives developed), norming (roles&duties),

decision making, rapid promotion, explicit control mechanisms, specialized
career paths, and segmented concern for employees

- reinforcement theory: rewarded behavior is likely to be repeated, whereas

performing, adjourning (disbanding)

• task specialist: concentrating fully on assigned task; socioemotional:
supports&encourages emotional needs; dual; nonparticipant doesn't

punished behavior is less likely to recur; occasional most effective

• reinforcement: action that follows directly from a particular behavior
• positive reinforcement: strengthens desired behavior by providing a reward,
10) Motivating&Satisfying

virtual: members who are geographically dispersed but communicate

contribute nor provide favorable input
17) Management&Accounting Info

undesirable task or situation, punishment: undesired consequence of

- data: numerical or verbal descriptions that usually result from some sort of info
- information data: presented in a form that is useful for a specific purpose

undesired behavior, extinction: eliminate undesirable behavior by not

• database: single collection of data&info stored in one pace that can be

negative reinforcement: strengthens desired behavior by eliminating an

responding to it

- equity theory: people are motivated to obtain and preserve equitable treatment;
most relevant to pay as an outcome

• equity: distribution of rewards in direct proportion to each employee’s
contribution to the organization

• input: time, effort, skills, education, exp we contribute to organization
• outcome: rewards we get from org (pay, benefits, promotions)
- input-to-outcome ratio vs w comparison other; having higher ratio may

used by people throughout an org to make decisions

• knowledge management (KM): firm’s procedure for generating, using, &
sharing data&info

- management information system (MIS): provides managers & employees w the
info they need to perform their jobs as effectively as possible (finance,
operations, marketing, human resources, admin)

• information technology (IT): officer manager at the executive level who’s
responsible for ensuring that a firm has the equipment necessary to provide

feel under rewarded

- expectancy theory: assumption that motivation depends on how much we want

the info the employer’s managers need to make effective decisions

• collecting data: est database w relevant & accurate data (internal sources:

something and how likely we think we are to get it; by Victor Vroom

management&employees, company records& reports, meetings; external

- goal setting theory: employees are motivated to achieve goals that they and

resources: customers, suppliers, financial institutions, online, trade&buis

their managers establish together

publications); storing data: in hard drives or larger comp network; updating

- management by objectives (MBO): managers and employees collaborate in
setting goals; secure acceptance of top management; best preliminary goals;

data: frequency can depend on speed changed & usage

• data processing: transformation of data into a form that is useful for a

manager&employee set goals for employee and decide on resources to

security > social: love&affection and sense of belonging > esteem: respect,
recognition, and a sense of accomplishment&worth > self actualization:

specific purpose

- statistic: measure that summarizes a particular characteristic of an

accomplish during individual meeting; periodic meetings to review progress; eval;
(-) doesn’t work unless process begins at top of org

need to grow&develop and become all that we’re capable of

- Herzberg’s Motivation-Hygiene Theory: satisfaction and dissatisfaction are
separate and distinct dimensions; state of no dissatisfaction never exists

• motivation factors: job factors (achievement, recognition, responsibility,
advancement, growth, and the work itself) associated with satisfaction,
although their absence doesn’t necessarily result in dissatisfaction;
presence act as satisfiers; provide more long term improvement

• hygiene factors: job factors (supervision, working conditions, interpersonal
relationships, pay, job, security, company policies, and admin) that reduce
dissatisfaction when present to an acceptable degree but that don’t
necessarily result in high levels of motivation; act as dissatisfiers when
absent

- Douglas McGregor’s The Human Side of Enterprise
• Theory X: consistent w Taylor’s scientific management; assumes that
employees dislike work and will function only in a highly controlled work
environment (managers make all the decisions and employees take all the
orders

• Theory Y: consistent w ideas of human relations movement; assumes
responsibility and work toward organizational goals, and by doing so they
also achieve personal rewards

- job enrichment: providing employees with more variety and responsibilities; works
best when employees seek more challenging work

entire group of num

• presenting info
- business reports: intro (desc prob, identifies research tech, previews

• job enlargement: expanding a worker's assignments to include additional but

material), body (objectively desc facts), conclusion (statements of fact),

similar tasks

recommendations (suggestions)

- visual displays: graphs, bar, pie charts; tabular display: in columns&rows

• job redesign: work is restructured to cultivate the worker-job match

- behavior modification: systematic program of reinforcement to encourage

• decision support system (DSS): software prog that provides relevant data

desirable behavior (target behavior > desired behavior)

- flextime: employees set their own work hours within employer-determined limits;

and info to help employees decide

• executive information system (EIS): comp based sys that facilitates &

reduce employee burnout and keep turnover low

supports decision making needs of top managers & senior executives by

• core time: when all employees must be at work; flexible time: choose

- part time work: permanent employment which employees work less than
standard work week

- job sharing: arrangement where 2 people share one full time position
- telecommuting: working at home all the time or portion of week
- empowerment: making employees more involved in their jobs by encouraging
participation in decision making

- team: 2+ workers operating as coordinated unit to accomplish a specific task or
goal

providing easy access to int/int info

• expert system: comp prog that uses artificial intelligence to imitate human’s
ability to think

- Accounting: process of systematically collecting, analyzing, & reporting financial
info

• audit: examination of company’s financial statements & accounting
practices that prod them; make sure a firm’s financial statements have been
prepared in accordance with GAAPs; doesn’t guarantee that the company
hasn’t “cooked" the books

- generally accepted accounting principles (GAAPs): an accepted set of
guidelines and practices for companies reporting financial information
and for the accounting profession

• Financial Accounting Standards Board (FASB): est & improves
accounting standards for US companies; working to est new set of

• merchandise inventory: value of goods on hand for sale to
customers

• prepaid expenses: assets paid for in advance but not yet been used

- fixed assets: assets that will be held or used for a per longer than 1yr
• depreciation: process of apportioning the cost of a fixed asset over

standards of GAAPs + IFRS (International Financial Reporting

the per during which it will be used; accumulated depreciation

Standards: created by International Accounting Standards board)

decreases fixed assets; amt allotted to each year is an expense for

• Sarbanes Oxley Act of 2002: Securities and exchange Commission (SEC)
req est a full time 5 member fed oversight board to police accounting
industry

that year

- intangible assets: don't exist physically but have a val based on the
rights or privileges they confer on a firm

• managerial accounting: provides info needed to make decisions about firm's
financing, investing, marketing, and operating activities

• financial accounting: generates financial statements and reports for
interested people outside an org

• cost accounting: determining the cost of producing specific prod or services
• tax accounting: planing tax strategy and preparing tax returns
• government accounting: providing basic accounting services to ensure that
tax revenues are collected and used to meet the goals of state, local, and
federal agencies

• not for profit accounting: helping not for profit orgs to account for all
donations and expenditures

• Occupational Outlook Handbook: published by Department of Labor; job
opportunities for accountants and auditors are expected to exp a 16% inc
about average employment growth between now and 2020

• private accountant: employed by specific org
• public accountant: works on a fee basis for clients and may be self
employed or be the employee of an accounting firm

• certified public accountant (CPA): met state req for accounting edu&exp
(college degree or specified hours of college course work and 1-3years on
the job exp) and has passed a rigorous accounting exam; plan and prepare
tax returns, determine true cost of prod and marketing a firm’s goods or
services, and compiling the financial info needed to make major
management decisions

- Accounting Equation: Assets = Liabilities + owner’s Equity
• double entry bookkeeping system: each financial transaction is recorded as
two separate accounting entries to maintain the balance shown in the
accounting equation

• annual report: distributed to stockholders & other interested parties that
describes the firm's operating activities and its financial cold

- balance sheet (statement of financial position): summary of the dollar amounts
of a firm's assets, liabilities, & owner’s equity accounts at the end of a specific
accounting per

• assets: resources that a buis owns; cash, inventory, equipment, & real
estate; listed in order from “most liquid” to "least liquid"

- liquidity: ease with which an asset can be converted into cash
- current assets: can be converted quickly into cash or that will be used in
one year or less

• marketable securities: stocks, bonds, & other investments that can
be converted into cash within days

• accounts receivable: allowing customers to make credit purchases;
paid within 30-60days; reduce by allowance for doubtful accounts

• notes receivable: customers have signed promissory notes; repaid
over longer per of time

• liabilities: firm's debts; borrowed money it owes to others that must be repaid
- current liabilities: debts that will be repaid in an year or less
• accounts payable: short term obligations that arise as a result of a
firm making credit purchases

• notes payable: obligations secured by promissory notes
• salaries&taxes payable: expenses incurred during current
accounting per but’ll be paid the next

- long term liabilities: debts that not need be repaid for at least one year
(i
...
mortgage payment on equipment)

• owner's (stockholder’s equity): what would be left for the owners if the firm’s
assets were sold & the money used to pay off its liabilities

- retained earnings: portion of a business’s profits not dist to stockholders
- income statement (earnings statement, statement of income&expenses):
summary of a firm’s revenues and expenses during a specified accounting per

• profit/loss: difference between income&expenses (cash surplus/deficit for
individuals)

• personal budget: specific plan for spending your income
• revenues: dollar amts earned by a firm from selling goods, providing
services, or performing buis activities

- gross sales: total dollar amt of all goods&services sold during the
accounting per

- net sales: actual dollar amounts received by the firm for the
goods&services it has sold after adjustment for returns, allowances, and
discounts

• sales returns: merchandise returned to the firm by its customers
• sales allowances: price reductions offered to customers who accept
slightly damaged or soiled merchandise

• sales discounts: price reductions offered to customers who pay their
bills promptly

• cost of goods sold: beginning inventory + net purchases - ending inventory
- gross profit: net sales - cost of goods sold
• operating expenses: all business costs other than the cost of goods sold
- selling expenses: costs relating to firm’s marketing activities
- general expenses: costs incurred in managing a business
• net income: revenues - cost of goods sold - operating expenses;
revenues>expenses; (net loss: expenses>revenues)

- net income from operations: gross profit - total operating expenses
- federal income taxes: not necessarily payable immediately; an expense

- statement of cash flows: illustrates how the company’s operating, investing, and
financing activities affect cash during an accounting per

• from operating activities: primary revenue source - providing goods&services
• from investing activities: cash flow from investments - purchase&sale of
assets&investments

• from financing activities: changes in debt obligation & owner’s equity
accounts - loans&repayments, stock, and cash dividends

- financial ratio: number that shows the relationship between two elements of a
firm’s financial statements

• return on sales (profit margin): net income after taxes ÷ net sales; indicates
how effectively the firm is transforming sales into profits (higher is better)

• current ratio: current assets ÷ current liabilities
• inventory turnover: number of times the firm sells its merchandise inventory
in one year; cost of goods sold in one year ÷ average value of the inventory
(beginning + ending inventory cal on income statement ÷ 2)
18) Money, Banking, Credit

- barter system: exchange in which goods/services are traded directly for others
- Money: anything society uses to purchase prod, services, or resources (currency:
metal coins & paper bills); serve as medium of exchange

• medium of exchange: anything accepted as payment for products, services,
and resources

• measure of value: single standard used to assign values to compare val of
products, services, and resources

• store of value: a means of retaining and accumulating wealth
• inflation: general rise in the level of prices; affects value stored as money
• divisibility, portability, stability (retain val over time), durability, & difficulty of
counterfeiting

• demand deposit: amount on deposit in a checking account
• time deposit: amount on deposit in an interest bearing savings account or
certificate of deposit

- written notice: can be req before withdrawal of money

• M1 supply of money: consists only of currency, demand deposits, and other
checkable deposits

• M2 supply of money: consists of M1 and savings accounts, certain money
market securities, and CDs (certificates of deposits)<100K; based on the
assumption that time deposits can be converted into cash for spending

- Federal Reserve System: central bank of the US responsible for regulating the
banking industry; mission to maintain an economically healthy and financially
sound business environment in which banks can operate; 7member board of
governors appointed by res and confirmed by Senate for 14yr term (chairman
and vice 2yrs); consists of 12 district banks and 24 branch banks; all national
(federally chartered) banks; state banks can join if they meet membership req;
serves as government bank, clears checks and electronic transfers, inspection
of currency, and selective credit controls

• provided liquidity - allowed banks in need of cash to borrow money
• supported troubled financial markets - provided secured loans to the
financial institutions

- commercial paper: short term promissory note issued by a large corp

• supported important financial institutions - provide non secure loans to large
banks

• conducted for major banks stress tests: measure how well the banks could
weather the economic crisis & if failed, banks req to obtain new capital (by
selling stock/bonds or acceptation fed gov funds)

• monetary policy: Fed Reserve’s decisions that determine the size of the
supply of money in the nation & the level of interest rates; control bank
reserve req, regulate discount rate, and running open market operations

• reserve requirement: percentage of its deposits a bank must retain, either in
its own vault or on deposit w its Fed Reserve district bank; when increased,
banks have less money avail for lending, economy tends to slow; when
decreased, Fed can make additional money avail for lending to stimulate
economy

- deposit expansion: once reserve req are met, remaining funds can be
used to create more money and make more loans

• discount rate: interest rate Fed Reserve Sys charges for loans to member
banks; lowered easier&cheaper for banks to obtain money, member banks
make more loans and charge lower interest rates, stimulating economy (vice
versa); interest rate paid by a bank to borrow funds from the Fed Reserve

• open market operations: buying&selling of US government securities by the
Fed Reserve Sys for purpose of controlling supply of money; carried out by
Federal Open Market Committee (FOMC); selling reduces nation’s money
supplies; most influential tool to influence monetary policy

- federal funds rate: interest rate at which a bank lends immediately avail
funds on deposit at the Fed to another bank overnight to meet the
borrowing bank’s reserve requirements; what the bank pays when they
borrow; determined by the open market; interest rate paid by a bank to
borrow funds from other banks

• Truth in Lending Act: requires lenders to state clearly the annual percentage
rate and total finance charger for a consumer load

• margin: minimum amount (percentage) of the purchase price that must be
paid in cash or eligible securities, the investor may borrow the remainder;
requirements regulated by Fed Reserve

- commercial bank: profit making org that accepts deposits, makes loans, and
provides related services to its customers

• national bank: chartered by the US Comptroller of the Currency; approx
1,400; conform to fed banking regulations and subject to unannounced
inspections by federal auditors

• state bank: chartered by the banking authorities in the state in which it
operates; subject to unannounced inspections by federal auditors

- savings & loan association (S&L): financial institution that offers checking and
savings accounts and CDs and that invests most of its assets in home
mortgage loans and other consumer loans

- credit union: financial institution that accepts deposits from, and lends money
to, only the members; may provide higher interest on deposits and loans at lower
cost

- organizations that perform banking functions:
• mutual savings banks: owned by their depositors who receive the profits
through dividends or higher interest rates on savings

• insurance companies: provide long term financing for commercial real
estate proj

• pension funds: est by employers to guarantee their employees a reg monthly
income on retirement

- banking industry traits: honest, interact w people, strong background in
comp skills

• managing credit card debt
- personal investment: use of your personal funds to earn a financial return
- financial planner: individual w at least 2yrs of training in investments, insurance,

amt to

- Dow Jones Industrial Average: an average of 30 leading US corporations that

accounting, appreciate relationship between banking and finance, possess basic

- check: written word for a bank or other financial institution to pay a stated dollar
• NOW (negotiable order of withdrawal) account: interest paying checking
account

- savings accounts (time deposits): produce a safe place to store money & a very
conservative means of investing

than usual interest rates
aren't able to do so elsewhere

• investment banking firms: assist corporations in raising funds

- Occupational Outlook Handbook: published by US Dept of Labor, a number of
different positions in banking industry projected to have average growth between
now and 2020

reflect the US stock market as a whole

- safety: minimal risk of loss / risk: measure of uncertainty about the outcome
• blue chip stock: a safe investment that generally attracts conservative
investors

• certificate of deposit (CD): document stating that the bank will pay the

• rate of return: total dollar amt of return you receive on an investment over a

depositor a guaranteed interest rate on money left on deposit for a

specific per of time ÷ amount invested; subtract the investment’s initial val

specified per of time

from the investment’s value at the end of year > add the dividend amount >

- short term business loans: must be repaid within a year
• line of credit: loan that is approved before the money is actually needed
• revolving credit agreement: guaranteed line of credit
- long term business loans: repaid over a per of years
• collateral: real estate or property pledged as security for a loan
- debit card: electronically subtracts the amount of your purchase from your bank
account at the moment the purchase is made

- electronic funds transfer (EFT): means of performing financial transactions
through comp or telephone

• automatic teller machines (ATMs): electronic bank teller
• automated clearinghouse (ACH): designed to reduce the number of paper
checks; processes Soc Security benefits, tax payments, employee salaries

• point of sale (POS) terminals: computerized cash register located in a retail
store & connected to bank’s computer

• electronic check conversion (ECC): used to convert info from a paper check
into an electronic payment

- letter of credit: legal doc signed by a bank or other financial inst guaranteeing to
pay a seller a stated amt for a specified per of time (usually 30-60days); certain
conditions may be specified before payment is made

- banker’s acceptance: written order for a bank to pay a third party a stated
amount of money on a specific date; simply an order to pay guaranteed by a
bank without any strings attached

- Federal Deposit Insurance Corporation (FDIC): insure deposits against bank

divide total dollar amount of return by original investment

• generally give up some safety for higher dollar returns on investments;
POTENTIAL RETURN SHOULD BE DIRECTLY RELATED TO THE ASSUMED RISK

- liquidity: ease with which an investment can be converted into cash
- traditional (conservative) investments: bank accounts, corporate&gov bonds;
more speculative investments: common&preferred stock, mutual funds, real
estate; most speculative investments: short&margin transactions, stock options,
derivatives, commodities, precious metals, gemstones, coins, antiques,
collectibles

• bank accounts: pay interest on passbook savings accounts, money-market
accounts, CDs, and other interest bearing accounts

• corporate & gov bonds: issued to obtain financing; provide predictable
source of income

- gov bonds: risk-free but pay lower interest than most other investments
• municipal bond (muni): debt security issued by a state or local gov;
interest income may be tax exempt from fed taxes

• corporate bonds: long term debt financing that must be repaid,
income producing investments

• convertible corporate bonds: carry a lower interest rate than
nonconvertible bonds by 1~2%; have opportunity for increased
investment growth; inc along with market value of common stock

• common stock: issued to finance business start up costs and help pay for
expansion & ongoing buis activities

maintained in different categories of legal ownership are insured separately

- dividend income: dividend payments on quarterly basis
• stock dividend: in the form of additional stock; paid in proportion to

borrowed money, w or without interest, at a later date

- capital gain: difference between security’s purchase price and selling

failures; provides basic deposit insurance of 250,000/depositor; deposits

- credit: immediate purchasing power that is exchanged for a promise to repay
• factors to consider (5Cs): character, capacity, capital, collateral, conditions
• global credit reporting agencies: present detailed credit info about specific
companies

• local credit reporting agencies: may req a monthly or yearly fee for providing
info on continual basis

• industry associations: may charge service fee

• brokerage firms: offer combo savings&checking accounts that pay higher
• finance companies: provide financing to individuals & business firms that

taxation, retirement planning, & estate planning and passed a vigorous exam

numbers of shares owned

price; earned by selling when market val stock higher than orig purchase
price

- market value: price of one share of stock at a particular time
- stock split: division of each outstanding share of a corporation’s stock
into a greater number of shares; to bring price own when market cal
increases beyond optimal price range (attractive to investors)

• preferred stock: receive dividends before common stockholders; dividend
20) Personal Finances&Investments

- managing your personal finances:
• tracking your income, expenses, assets, & liabilities
- personal income statement: lists income & expenses for a per, can
determine surplus or deficit

- personal balance sheet: lists assets & liabilities on a specific date
• net worth: difference between val of total assets & liabilities
• personal budget: specific pan for spending your income

amount specified on stock certificate

- cumulative: assured that omitted dividends will be paid to them before
common stockholders receive any

- convertible: profit through growth as well as dividends; combines lower
risk of preferred stock with possibility of greater speculative gain
through conversion to common stock

• mutual funds: pools of money of many investors (Shareholders) to invest in a

• margin call: received from brokerage firm if val of stock bought on

variety of different securities; professional management and diversification;
managed by professional fund managers who devote large amt of time to
picking just the “right” securities for their fund’s portfolios

- open end fund: issues&sells new shares to any investor who requests
them; buys back shares from investors who wish to sell all or part of
their holdings; can be purchased/sold directly from investment company
that sponsors fund on any buis day

- closed end fund: sells shares in the fund to investors only when the fund
is originally organized; can be purchased or sold on any buis day through
a securities exchange or over-the-counter market

- exchange traded fund (ETF): generally invests in the socks or other
securities contained in a specific stock or securities index; can be
purchased or sold on any buis day through a securities exchange or
over-the-counter market

- net asset value (NAV): per share equal to current market val of mutual

margin decreases to 60% of orig price; provide additional collateral
or stock is sold

- Standard & Poor’s 500 Stock Index: index that contains 500 different stocks
that reflect inc/dec in value for the US stock market as a whole

- asset allocation: process of spreading your money among several different
types of investments to lessen risk

• time factor & age important
- investment suggestions
• eval potential investments, monitor val of investments, keep accurate and
current records

- internet: “personal finance” or “financial planning”; Motley Fool Web, CNN Money,
Market Watch, Yahoo Finance, Smart Money

- professional advisory services: provide info about investments; avail at uni and
public libraries

- brokerage firm analysts’ reports: detailed reports on individual corporations and

fund’s portfolio - mutual find’s liabilities ÷ number of outstanding shares;

their securities; based on corp’s sales, profits/losses, management, and planning

calculated once a day and reported publicly

plus other info (industry, demand for its products, efforts to develop new

- load fund: pays a sales charge every time he/she purchases shares;
3~5%

• contingent deferred sales fee: 1~5% of amt withdrawn during first
5-7 years; declines each year until there is no withdrawal fee

- no load fund: pays no sales charges at all
- expense ratio: all different management fees; 12b-1 fees; and additional
operating costs for a specific fund

• distribution fee (12b-1): defray the costs of advertising and
marketing mutual fund; calculated on val of fund’s assets and
cannot exceed 1%

- index fund: outperform managed funds; lower fees charged by these
passively managed funds

- stock funds: invest in stocks issued by small, medium size, and large
corporations that provide investors with income, growth, or a combo

- bond funds: invest in corporate, government, or municipal bonds that
provide investors with interest income

• aggressive growth stock, balanced, global stock, growth stock, high
yield (junk) bond, income stock, index, life cycle, long term US bond,
regional, sector stock, socially responsible, and small cap stock
funds

- family of funds: exists when one investment company manages a group
of mutual funds

• real estate: best hedge against inflation; consider: priced competitively with
similar property, financing avail, taxes, and repair/remodel costs

• high risk investment: made in the uncertain hope of earning a relatively large
profit in a short time

- buying long: buying a stock with the expectation that it will increase in
value and then can be sold at a profit

- selling short: process of selling stock that an investor doesn’t actually
own but has borrowed from a brokerage firm and will repay at a later
date; arrange to borrow certain shares, sell borrowed stock immediately,
after price drops buy same number of shares, give newly purchase
stock to brokerage firm in return for stock borrowed; can make money
with short transaction if the stock’s value does decline

- margin requirement: portion of the price of a stock that cannot be
borrowed; 50%

products, current economic environment); provided free to the clients of full
service brokerage firms; avail from discount brokerage firms for a fee

- business periodicals: magazines that provide general economic news and
detailed financial info about individual corporations (Bloomberg Businessweek,
Fortune, Forbes)

- corporate reports: annual reports of publicly held corps w desc of company’s
performance, info about firm’s prod/services, detailed financial statements
readers can use to eval firm’s actual performance; letter from accounting firm
that audited

• prospectus: detailed, written desc of a new security, the issuing corp, and
corp’s top management

- security average (security index): average of the current market prices of
selected securities; indicate price trends, but don’t predict performance of
individual investments; give investor a “feel” for what is happening to prices

- limit order: request that a security be bought or sold at a brice equal to or better
than (lower for buying, higher for selling) some specified price; good until
cancelled

- commissions: minimum $7~25 for buying and selling stock; based on number of
shares and val of stock bought/sold; lower for trading bonds, commodities, and
options than for trading stocks; pay when you buy or sell shares, not both

- full disclosure: investors should have access to all important facts about stocks,
bonds, and other securities so they can make informed decisions; requires that
corps issues new securities file a registration statement and publish a
prospectus

- insider trading: occurs when insiders (board members, corporate managers, and
employees) buying and selling a corp’s stock

- SEC (Securities and Exchange Commission): created by Securities Exchange
Act, agency that enforces fed securities regulations; supervises all national
exchanges, investment companies, OTC market, brokerage firms, and any org
involved in trading securities



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