MFT – CNU Business School – Flashcards

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Financial statements
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- balance sheet - income statement - statement of retained earnings - statement of cash flows
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Balance Sheet:
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The balance sheet (also called the statement of financial position) reports the financial position of the business at a point in time (the report date).
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Assets
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resources owned by the business that provide probable future economic benefits to the business.
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Current Assets vs. Long-term Assets:
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Current - converted to cash, sold, or consumed within one year, or the business operating cycle whichever is longer/ Long-term -assets that are expected to be held for more than one year, or the business operating cycle whichever is longer.
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Cash in a balance sheet includes:
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- cash on hand - in the bank - petty cash
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Liabilities:
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obligations of a business or organization or claims against assets.
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Current Liabilities:
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Debts to be paid within one year or the operating cycle if longer than one year.
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Long-term Liabilities:
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Obligations not due for more than one year, or the business operating cycle whichever is longer.
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Equity:
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is the owner's claim to the assets or the residual interest in the assets of an entity after deducting liabilities
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Income Statement:
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The income statement reports revenues earned less the expenses incurred by a business over a given period of time (the reporting period) and the resulting net income or loss.
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Gross profit
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= Sales - COGS
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Statement of Retained Earnings:
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The statement of changes in retained earnings reports on changes in retained earnings over a given period of time (the reporting period).
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Statement of Cash Flows:
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The statement of cash flows describes the sources and uses of cash for a given period of time (the reporting period). It is organized according to a company's major activities: operating, investing, and financing activities.
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What are the two generally accepted formats for reporting operating activities?
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the direct method and the indirect method
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To prepare financial statements in the United States one must use the:
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Generally Accepted Accounting Principles (GAAP)
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When preparing financial statements, other countries may use:
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International Financial Reporting Standards (IFRS).
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One major difference between IFRS and GAAP is:
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IFRS does not allow LIFO.
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Cost Principle:
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States that acquired assets and services should be recorded at their actual costs incurred in business transactions. Also called historical cost
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Revenue Recognition Principle:
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- Provides guidance as to when revenue should be recognized. - It states: Revenue is recognized when at the earned, the inflow of assets associated with revenue may be in a form other than cash, and the amount of revenue should be measured as the cash received plus the cash equivalent (market) value of any other assets received from customers in exchange for goods or services
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Expense Recognition Principle (matching principle):
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Provides guidance as to when expenses are recorded and reported. Expenses are recognized when the revenue is generated by these expenses is recognized.
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Matching Principle:
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The matching principle directs accountants to identify all expenses incurred during the accounting period and to match the expenses against the revenues earned during that same period of time (deals with depreciation)
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Depreciation
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- matches the cost of an asset to the time periods the asset provides benefits. - Can be calculated using straight line, units of production, sum of the years digits and declining balance methods.
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Straight line depreciation
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considers depreciation a function of time.
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Units of production depreciation
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assumes depreciation is a function of use or productivity.
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Sum-of-the-years-digits depreciation
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results in a decreasing depreciation charge based on a decreasing fraction of depreciable cost.
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Declining balance depreciation
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method that utilizes a depreciation rate to a declining book value.
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Conservatism Principle:
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- practice followed in an attempt to ensure that uncertainties and risks inherent in business situations are adequately considered. - Example: when in doubt overestimate expenses and liabilities and underestimate assets and revenue
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Sole proprietorship is
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- a business owned by one person that has unlimited liability. - The business is not subject to an income tax but the owner is responsible for personal income tax on the net income of entity. - single level of taxation
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Partnership is
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- a business owned by two or more people, called partners, who are subject to unlimited liability. - The business is not subject to an income tax, but the owners are responsible for personal income tax on their individual share of the net income of entity. - single level of taxation
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Corporation is
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- a business that is a separate legal entity whose owners are called shareholders or stockholders. - These owners have limited liability. - The entity is responsible for a business income tax and the owners are responsible for personal income tax on profits that are distributed to them in the form of dividends. - double level of taxation
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Sarbanes-Oxley Act:
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- In response to a number of publicized accounting scandals (Enron, WorldCom, Tyco, ImClone), Congress passed the SOX in 2002 - attempts to help curb financial abuses at companies that issue their stock to the public. - The act requires that public companies apply both accounting oversight and stringent internal controls.
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SOX desired results
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- more transparency - accountability - truthfulness in reporting transactions
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Prepaid Expenses:
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- Prepaid expenses are advance payments of expense. - As prepaid expenses are used up/ expire they become an expense of the period.
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Accrued expenses also correspond to:
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an indirect method of preparing operational cash flows for the Statement of Cash Flows
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Accrued expense:
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- an expense that the business has incurred but has not paid. (i.e., a liability) - An example is salary liabilities not paid at period end (that is no cash has been paid to the employee(s)
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Opportunity Cost:
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The potential benefit that is given up when one alternative is selected over another.
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Sunk Costs:
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Sunk costs have already been incurred and cannot be changed now or in the future. They should be ignored when making decisions.
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Just-In-Time (JIT) production:
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Lean production is often called just-in-time (JIT) production because products are only made in response to customer orders and they are completed just-in-time to be shipped to customers. This approach minimizes finished goods inventory.
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Absorption costing
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- also called the full cost method - treats all costs of production as product costs, regardless of whether they are variable or fixed. - is required by GAAP.
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Variable costing:
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Variable costing treats all variable costs of production as product costs, and expenses in the period incurred all other costs including fixed costs of production. It is used for management decision making.
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The Margin of Safety:
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The margin of safety is the excess of budgeted (or actual) sales over the break-even volume of sales. It can be expressed in units or dollars
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Margin of safety =
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Total sales - Break-even sales
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Job-order costing:
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is used when many different products are produced each period, products are manufactured to order, and the unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.
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Process costing:
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is used when a single product is produced on a continuing basis or for a long period of time.
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Activity Based Costing:
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Pools are created to correspond to the activities performed in an organization that cause the consumption of overhead resources. Cost pools are allocated to products and other cost objects using the measures of activity.
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Target costing:
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A costing method in which the firm determines the allowable (i.e., "target") cost for a product or service given a competitive market price and a targeted profit.
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Target costing process:
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1. Determine the market price 2.Choose a target price 3.Determine the desired profit 4.Derive a target cost per unit: Target Price per unit minus Target Operating Income per unit
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Differential Costs and Revenues:
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Costs and revenues that differ among alternatives. Every decision involves a choice between at least two alternatives. Only those costs and benefits that differ between alternatives are relevant in a decision. All other costs and benefits can and should be ignored.
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Special Order:
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- a one-time order that is not considered part of the company's normal ongoing business. - only the incremental costs and benefits are relevant. In most cases, these would include selling price, variable cost and any addition fixed costs required to complete the order.
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Economic profit (or loss):
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The difference between the revenue received from the sale of an output and the opportunity cost of the inputs used.
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Materials price variance =
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Actual quantity (Actual Price - Standard Price)
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Materials quantity variance =
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Standard Price (Actual Quantity - Standard Quantity)
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Goal of a business is to
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maximize owners' wealth.
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Two major measures of wealth:
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- Profit or EPS - EPS is a good measure but sometimes may ignore the level of risk. - Stock price: the best measure available
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2 types of financial markets
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- money market - capital market
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Money market deals with
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short-term, liquid securities
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Capital market deals with
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long-term securities
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Capital market is classified into:
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Primary and Secondary markets
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In the primary market only new securities are sold by...
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the companies
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Old securities are traded in...
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the secondary markets (e.g., New York Stock Exchange, American Stock Exchange, NASDAQ etc.).
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Market Efficiency:
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- Weak-form: past information cannot help one in 'beating' the market (i.e., do better than others) - Semi-strong form: not only the past , even the current information cannot help in 'beating' the market - Strong-form: even proprietary information is not useful in doing better than others.
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EPS is
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net income available to common stockholders/no. of shares outstanding (net income available to common stockholders = net income - after tax expenses).
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Book value of common equity =
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common stock + retained earnings (from balance sheet).
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Retained earnings =
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= net income available to common stockholders - dividend paid to common stockholders.
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Net cash flow =
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net income + depreciation.
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All operating expenses, depreciation and amortization, interest expenses (are/ are not) tax deductible.
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are
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Dividend payments, to common and preferred stockholders, and debt repayments (are/ are not) tax deductible.
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are not
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Major classifications of assets:
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current or short term assets. Includes: cash, inventory, receivables, marketable securities; long-term assets: plant and equipment, land, etc.
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Current or short term debt =
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accounts payable + notes payable+ accrued wages and taxes + current portion of the long term debt.
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Total cash flow =
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cash flow from operating activities + cash flow from financing activities +cash flow from investment activities
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Purpose of ratio analysis:
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to understand and examine the financial strengths/weaknesses of a company
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Liquidity position is measured by:
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current and quick ratio.
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Quick ratio is a better measure of liquidity because:
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it does not consider inventory which generally has the least liquidity among current asset items.
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Average collection period or days sales outstanding (DSO) measures:
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- the time required to collect receivables. - If the level of receivables is higher, it takes longer to collect and the receivable turnover ratio is lower.
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Inventory turnover ratio indicates:
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- level of inventory. - since inventory is an idle asset, this ratio should be as high as possible
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Important measures of profitability are:
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- gross profit margin - operating profit margin' - net profit margin. - All of these measure profit relative to sales
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Debt ration effects:
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ROE
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The higher the debt ratio - everything else remaining the same - ROE will be (lower/higher)
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higher
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Price-Earning (P-E) ratio =
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price per share/EPS.
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PE Ratio:
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is a measure of price of a stock relative to its earning. Higher the P-E, higher is the relative price.
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Measures of asset utilization:
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- Total and fixed asset turnover ratios - If these ratios are high it means the assets are well utilized.
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Indicates the level of debt financing by the company
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debt ratio - also an indicator of risk
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In preparing common-size income statement all the items on the income statement are converted into:
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percentages of total sales
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In a common-size balance sheet, items of the balance sheet are converted into:
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percentages of total assets
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Value of money, present or future, is affected by
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interest rate and the length of the investment period.
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There is a positive correlation between
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If interest rate and/or length of investment period and future value
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If money is compounded more frequently than once per year, the effective rate earned on an investment will be (lower/greater) than the annual percentage rate (APR).
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greater
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Annuity is:
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a series of equal or uniform cash flow
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Annuity due
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If cash flow start at the beginning of each period
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Ordinary annuity
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If cash flows start at the end of each period
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Perpetuity
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an infinite annuity
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When interest rate is 'zero' there is...
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no difference between present and future value of an investment
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Financial forecasting:
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estimates the projected changes in financial variables like sales, assets, liabilities, expenses etc.
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Percentage of sales method in financial forecasting:
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estimates the financial variables given the sales forecast.
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Assumptions of percentage of sales method
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ratios of certain financial variables to sales are constant and these variables change spontaneously with sales.
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Goals of percentage of sales method
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to estimate the discretionary financing, i.e. amount of financing to be explicitly arranged by the management, e.g. short or long-term borrowing, issuance of equity etc.
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Spontaneous financing are
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those which are automatically raised with the increase in business activity or sales.
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Weakness of percentage of sales method in financial forecasting:
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financial variables to sales ratio do not remain constant and assets are increased or decreased in discrete quantities instead of on a continuous basis.
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Risk:
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the level of uncertainty or variability
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Risk can be measured by
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variance, standard deviation, and coefficient of variation (higher values of these measures indicate higher risk).
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Diversification:
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spreading investment capital over different assets or investments (i.e. by constructing investment portfolio) to reduce risk.
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Two types of risk:
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- firm or company specific - market related risk
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firm or company specific
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also called non-systematic or diversifiable, e.g. management problem, labor trouble, cash flow problem etc.
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market related risk
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also called systematic or non-diversifiable risk and is function of economic policy, political situation, inflation etc.
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How can non-systematic risk can be diversified away?
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- By constructing a diversified portfolio - But cannot diversify away the market related risk.
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Market related risk is measured by:
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- Beta - And for the market as a whole it is equal to one.
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Relationship between risk and return is .......
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positive
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Total return =
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risk free rate + risk premium
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Risk premium increases/ decreases with beta.
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increases
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Beta of a portfolio is:
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the weighted average of the betas of the securities in the portfolio.
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Portfolio return is:
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the weighted average of the returns of the securities in the portfolio.
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Bond:
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a security that promises to pay the investor a certain fixed return per year over its life.
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Zero-coupon bonds:
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do not pay any direct interest. Sold at discount and at maturity pays full face value.
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Debentures:
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bonds without any collateral (unsecured).
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Bonds have a par or face value which is due at ...
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maturity
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Coupon rate is:
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the rate of interest payment based on the par value.
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Interest payment =
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coupon rate x par value
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Bond ratings indicate:
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- quality, i.e. default risk of the bond. - Higher quality bonds are safer and so, have lower yields.
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Value of a bond is
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the present value of the expected cash flow, i.e. present value of the future interest income and par value.
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Value of a bond is (pos/neg) related to the market interest rate,
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negitively
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Discount
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If the coupon rate of a bond is less than the market rate, the bond will be selling at a discount (i.e., at a price below its par value)
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Premium
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if coupon rate is above the market interest rate, the bond will be selling at a premium (i.e., at a price above its par value)
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Par value
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if coupon interest rate is equal to the market rate, the selling price will be equal to the par value.
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Bonds generally pay interest.....
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semi-annually
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Yield to maturity:
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annual rate of return earned by the investor if the bond is held until maturity and if the interest income is reinvested at the required rate of return.
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Current yield of a bond is equal to:
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its coupon payment over its closing price.
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Bond prices are not reported in dollars, rather they are reported in:
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- Percentages of the par value - E.g., a bond having a par value of $1,000 closed at 101.25, i.e., the closing price was 101.25 percent of par value, which is equal to $1,012.50.
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Callable bonds
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Bonds that could be retired before maturity.
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Call price =
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par value + call premium. - Call premiums are predetermined.
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Market interest rate of a security =
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risk free rate + risk premium
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Risk free rate is:
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when the investment has zero risk
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Risk free rate =
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real rate + inflation
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Real rate:
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yield, when investment has zero risk and also, inflation is zero.
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For a bond, risk premium risk premium =
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default risk premium + maturity risk premium + liquidity risk premium
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Expectations theory:
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long term rates are the averages of expected short-term rates. So, if short-term rates are expected to go up or down, long-term rates are also expected to go up or down, respectively.
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Liquidity preference theory:
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long-term rates will always be higher than the short-term rates because investors prefer short-term investments due to their liquidity, but the borrowers prefer to borrow long-term because of lower risk.
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Market segmentation theory:
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rate for different maturities of a security will be determined by the supply and demand for capital in each segment.
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Dividends on preferred stocks have to be paid before ....
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any dividend is paid to common stock holders
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Preferred stockholders do not have any:
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ownership rights or voting rights.
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Common stockholders are:
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- the owners of the company - they have voting rights
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Value of a common stock =
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(expected dividend in next period)/(required rate of return - growth rate)
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Dividend yield =
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(dividend)/price per share
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Bond values of stocks are reported in.....
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Dollars
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Payback period =
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(initial outlay)/(cash flow per year)
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NPV =
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PV of cash inflow - initial outlay
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If NPV is positive,
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the project is acceptable - if it is negative, project is not acceptable
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Initial outlay =
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(base price + transportation cost + modification cost + installation cost) + change in net working capital - (salvage value of the existing asset +_ Tax)
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Common equity has two components:
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- internal common equity(retained earnings) - external equity(new common stock)
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Aggressive managers use more .... captial while conservative managers use more.... capital
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short term, long term
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Advantages of foreign investment:
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- cheap labor - cheap raw materials - less regulations - tax breaks - higher economic growth in the foreign country
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Risks of foreign investment:
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-exchange rate risk - political risk - infrastructure risk - corruption - bureaucracy
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Ways that corporations can invest in foreign markets
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- setting up subsidiaries - joint ventures - licensing agreement - merger
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Individual investors can invest in foregin markets by:
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- foreign mutual funds - ADR (American Depository Receipts), - investing in companies with significant foreign exposures
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Spot rate:
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exchange rate currently available
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Fforward rate:
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right to buy or sell foreign currency at a certain rate until sometime in the future.
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Purchasing power parity (PPP):
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exchange rate of a country is inversely related to the inflation in that country.
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LIBOR
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(London Inter-bank Offer rate), interest rate charged on inter-bank Eurocurrency loans.
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Supreme Court Jurisdiction
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cases arising under federal law or under the US Constitution
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Common law:
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case law made by judges
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Statutory law:
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laws passed by legislative bodies
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National Labor Relations Act, (NLRA) )
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- union organizing, bargaining, unfair labor practices
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Title VII of the 1964 Civil Rights Act
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- aka Equal Employment Opportunity Act (EEOA) - discrimination in employment
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Fair Labor Standards Act (FLSA)
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- wages and hours
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Occupational Safety and Health Act (OSHA)
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- workplace safety
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Federal Trade Commission Act
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- unfair and deceptive trade practices
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Anti-Trust Laws
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- Sherman Act - Clayton Act - monopolies and competition
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Liability for corporate crim
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Actions of high level managers can be attributed to the corporation and thus create corporate criminal liability in addition to the individual liability of the actors involved
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Bankruptcy Act
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- Chapter 7- individuals and corporations -liquidation - Chapter 11- reorganization for corporations - Chapter 13-reorganization for individuals
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Administrative Procedure Act-
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sets forth requirements for administrative agencies
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DMCA- Digital Millenium Copyright Act-
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addresses issues of liability for infringement, circumvention of security, criminalizes some types of infringement
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Embezzlement:
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misappropriation of money or property with which the defendant was entrusted- often in the course of em creating a false document or signature with the intent to deceiveployment (breach of fiduciary duty).
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Forgery:
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creating a false document or signature with the intent to deceive
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Fraud:
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intentional misstatement of fact on which the plaintiff justifiable relies to the plaintiff's detriment—also securities fraud which applies the definition in the context of purchase or sale of a security under SEC Rule 10(b)5
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RICO:
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use of income from a pattern of racketeering activity (illegal activities such as arson, gambling, extortion) to acquire and interest in, or operate an enterprise, i.e. gaining funds from illegal activity and using those funds in another business
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Basic elements of contracts
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- Agreement (offer and acceptance) - Consideration (exchange of legal value) - Capacity (over 18 and mental capacity) - Legality -object of contract must be legal
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Statute of Frauds requires these contracts to be in writing:
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- Contracts for the sale of an interest in real estate - Contracts that cannot be performed within 365 days (indefinite contracts are not within this section - Contracts to pay the debts of another (includes estate administrators as well as other guarantors) - Contracts for the sale of goods of $500 or more.
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Contract clauses in deeds:
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Restrictive Covenants- rules that limit a landowners use of land such as building requirements, setback lines, structures permitted on property, etc
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Kantian perspective
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Aka deontology- Rights theory—Categorical Imperative—basic rights - an ethical choice is one which you would want everyone to follow—not just in a particular set of circumstances
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Utilitarian perspective
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Aka teleology - weigh the benefits and costs of a decision to determine which course of action will result in the greatest good (quality and quantity) for the greatest number of people.
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Virtue Ethics:
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derived from philosophy of Aristotle- focus on being virtuous, not on particular actions
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Justice Theory:
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- Equal rights to basic rights and liberties. - Ethical decision must be based on fairness and impartiality. - Focus on outcome—an ethical decision would not put those who are disadvantaged in an even worse position.
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Moral Relativism
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-different moral systems have to be tolerated - even when we disagree--because there is no absolute right
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Business types with limited liability:
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- corporation - Limited Liability Company (LLC) - Limited Liability Partnership (LLP) - Limited Partnership (LP)
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Business types with unlimited liability
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- General partnership - Sole proprietorship
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Respondeat Superior:
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- vicarious liability of the employer for the torts committed by employees - also applies to partners and the partnership for torts committed by one of the partners
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What is patentable?
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- machine - manufacture - composition of matter (can include living organism, an ornamental design for a product, a business method (although these are being challenged) - a plant produced by asexual reproduction
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How long does a patent last?
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for 20 years from filing
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Two types of patent infringement:
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literal or by doctrine of equivalents
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If two people try to file a patent, how does the court decide who gets it?
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First to file rule
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Copyright
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Protection of an idea that is expressed in a tangible medium (NOT the idea itself)
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Durantion of copyright
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- Life of the creator plus 70 years - if an institutional creator, 95 years from publication or 120 from creation—whichever is shorter
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Works for hire:
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when a person is hired for the purpose of developing intellectual property the employer generally owns the property.
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Defenses to Infringement:
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- First Sale Doctrine - Fair Use (transformative, limited use of copyrighted work)
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Pre-trial procedure: Discovery
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Parties to lawsuit exchange information prior to the trial
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Pre-trial procedure: Interrogatories
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questions under oath of parties
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Pre-trial procedure: Depositions
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questions under oath of witnesses
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Pre-trial procedure: Requests for Admissions
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method of stipulating the facts
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Four main intentional torts:
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Assault, battery, false imprisonment, defamation
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Negligence:
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- defendant breaches a duty of care owed to plaintiff - breach proximately causes plaintiff's injury
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Res ipsa loquitor
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- 'let the thing speak for itself' - when the burden of proof shifts to the defendant to show the defendant was NOT negligent
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Res ipsa loquitor only applies in limited circumstances when:
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- the injury would not normally occur absent negligence - the defendant had exclusive control of the instrumentality of harm
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Strict Liability:
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applied to inherently dangerous activities and unreasonably dangerous, defective consumer products—liability without fault.
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Contributory negligence
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- Va. and a minority of states practice this - any negligence by plaintiffs bars recovery
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Comparative negligence
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- majority of states practice this - damages are apportioned based on percentage of fault.
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Business Torts:
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Interference with contractual relationships—improper interference in order to induce one party to breach a contract
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Cohesion
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degree of attraction people feel toward the team, and their motivation to remain members
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Cohension is influenced by:
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- member similarity - team size - member interaction - somewhat difficult entry - team success - external competition - challenges
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Outcomes of cohesion
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- motivation to remain members - willingness to share info - strong interpersonal bonds - effective conflict resolution - better interpersonal relationships - conformity to norms, lower performance when team is cohesive but norms conflict with organizational goals
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Diversity
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condition of being composed of different types of people (e.g. race, culture)
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Stereotyping
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the process of assigning traits to people based on their membership in a social category
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Prejudice
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unfounded negative emotions and attitudes toward people belonging to a particular stereotyped group
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Discrimination
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the prejudicial or distinguishing treatment of an individual based on their actual or perceived membership in a certain group or category
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Diversity training
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helps participants learn to minimize stereotype activation and application
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Management Functions:
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- Plan - Organize - Direct - Control
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Entrepreneur:
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- a person who organizes and manages any enterprise, taking on financial risk to do so; one who transform innovations into economic goods
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Challenges of being an entrepeneur:
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- inadequate capital - lack of proper organization - failure to delegate authority and responsibility - poor time management
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EPG Model
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an international business model including three dimensions: - ethnocentric - polycentric - geocentric
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Ethnocentric
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home country oriented; people from the home country are placed into key positions worldwide
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Polycentric
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host country oriented; local preferences and techniques are most appropriate when dealing with local market conditions
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Geocentric
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global oriented; does not show bias to either home or host country preferences; management selects the person best suited to foster the company's goals and solve problems worldwide
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Hawthorne Effect
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Individuals may change their behavior when they know they are being studied
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Human Resources Management (HRM)
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the design and control of formal systems for the management of people within organizations
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Equal Employment Opportunity (EEO)
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- freedom from discrimination on the basis of sex, color, religion, national origin, disability, and age. - Enforced by the Equal Employment Opportunity Commission (EEOC) and its state counterparts
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National Labor Relations Act (NLRB)
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guarantees basic rights of private sector employees to organize into trade unions, engage in collective bargaining for better terms and conditions at work, and take collective action including strike is necessary
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Strategic planning
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the organization's process of defining its strategy or direction, and making decisions on the allocation of resources to pursue this strategy
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Unity of Command
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- one of Henri Fayol's Principles of Management. - Says that employees should have only one direct supervisor
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A number of ways to choose X items out of N items =
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N!/X!(N-X)!
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Confidence interval computation using formula =
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¯X±z_(?/2)*?/?n
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Null hypothesis always contains a:
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= sign
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The testing of the hypotheses starts with assumption that:
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the null hypothesis is true
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Hypotheses can be of three types:
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1- H0: = number H1: ? number (testing left AND right tails of sampling distribution) 2- H0: ? number H1: number (testing right tail of sampling distribution)
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EOQ model
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- inventory management model - assumes that the demand is constant throughout the year - the optimal ordering quantity is a tradeoff between fixed ordering cost and inventory holding cost
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Project management:
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shortest path method, activities precedence structure
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Independent demand is a demand for:
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finished product
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Dependent demand is a demand for:
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components of finished product, driven by independent demand.
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Types of Databases:
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relational, network, hierarchical
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Firewall
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a computer or a software blocking unwanted traffic from outside an organization
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4 phases of strategic management:
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- Environmental Scanning/Situation Analysis - Strategy Formulation, Strategy - Implementation/ Execution - Evaluation/Review and Control
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du Pont Identity:
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an expression that breaks return on equity (ROE) down into three parts: profit margin, total asset turnover and financial leverage.
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