Welcome to MGT 521

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Week 5 Topics. Business Overview IIIdentify basic concepts in economics, finance, managerial accounting, and business research and statistics. . Business Overview II Economics . What is Economics?. The study of how society chooses to employ resources to produce goods and services and distribute t

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2. Week 5 Topics Business Overview II Identify basic concepts in economics, finance, managerial accounting, and business research and statistics.

3. Business Overview II Economics

4. What is Economics? The study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals.

5. Big and Small Macroeconomics looks at the operation of a nation’s economy as a whole Microeconomics looks at the behavior of people and organizations in particular markets. Resource Development study of how to increase resources and to create the conditions that will make better use of those resources

6. See Learning Goal 1: Compare and Contrast the economics of despair with the economics of growth. Four “What’s” of an Economic System: These four questions are used in evaluating an economic system. Globalization has made these questions more important than ever as we trade with different global economies. How is the Peoples’ Republic of China, different than the United States economically? How would they address these questions? In a country like Russia decisions made concerning what is produced were made by the government. Who decides what is produced in the U.S.? (Consumers decide what is produced by their purchasing habits.) See Learning Goal 1: Compare and Contrast the economics of despair with the economics of growth. Four “What’s” of an Economic System: These four questions are used in evaluating an economic system. Globalization has made these questions more important than ever as we trade with different global economies. How is the Peoples’ Republic of China, different than the United States economically? How would they address these questions? In a country like Russia decisions made concerning what is produced were made by the government. Who decides what is produced in the U.S.? (Consumers decide what is produced by their purchasing habits.)

7. “Dismal Science” Thomas Malthus Early 1800s Too many people, too many in poverty Population control

8. Father of Modern Economics Adam Smith… An Inquiry into the Nature and Causes of the Wealth of Nations, 1776 Right to Freedom, Right to own land and property “Invisible Hand” In economics, the invisible hand, also known as the invisible hand of the market, the term economists use to describe the self-regulating nature of the marketplacIn economics, the invisible hand, also known as the invisible hand of the market, the term economists use to describe the self-regulating nature of the marketplac

9. Economic Flow

10. What is Capitalism?

11. Three Economic Systems See Learning Goal 2: Explain what capitalism is and how free markets work. See text pages: 34-40 See Learning Goal 3: Discuss the major differences between socialism and communism. See text pages: 41-42 See Learning Goal 4: Explain the trend toward mixed economies. See text pages: 43-45 See Learning Goal 2: Explain what capitalism is and how free markets work. See text pages: 34-40 See Learning Goal 3: Discuss the major differences between socialism and communism. See text pages: 41-42 See Learning Goal 4: Explain the trend toward mixed economies. See text pages: 43-45

12. A Free Market… Capitalism is… An economic system in which all of most of the factors of production and distribution are privately owned and are operated for profit.

13. The Foundation The right to private property. The right to own a business and to keep all of that business’s profits. The right to freedom of competition. The right to freedom of choice.

14. How Prices are Determined Supply The quantity of products that manufacturers or owners are willing to sell at different prices at a specific time. Demand The quantity of products that people are willing to buy at different prices at a specific time.

15. What is Market Price?

16. Equilibrium Point

17. How do businesspeople know what to produce and in what quantity?

18. Competition

19. Name an Example… Monopoly : one seller Oligopoly: few sellers Monopolistic Competition: many sellers, perceived differences

20. Limits of Free Markets Inequality of wealth causes tension Greed compromises ethics Limitations push towards socialism and government regulation

21. Socialism Based on the premise that some, if not most, basic businesses should be owned by the government so that profits can be evenly distributed among the people.

22. Bottom Line? Pros Social equality Redistributed wealth Social services Pro-employee policies Cons Less incentive for hard work High taxes Brain drain Less innovation/ inventions

23. Communism An economic and political system in which the state makes almost all economic decisions and owns almost all the major factors of production.

24. Key Economic Indicators Gross Domestic Product (GDP) Unemployment Rate Price Index Consumer Price Index (CPI) Producer Price Index (PPI)

25. What makes up the CPI?

26. Biggest Economic Challenges Pension and health care costs Federal deficit High energy and commodity costs Balance of payments Terrorism? Really?

27. Business Overview II: Financial Information & Accounting

28. What is Accounting?

29. Areas of Accounting Managerial : provides info & analysis to help inform decision making Financial : information prepared for outsiders Auditing: reviewing and evaluating records used to prepare financial statements Tax : prepares tax returns and tax strategies Gov’t/NPO: systems for orgs whose purpose is not to generate profits

30. The Accounting Cycle

31. What’s the difference between accounting and bookkeeping? Bookkeeping is mechanical in nature Accounting is the establishment of systems of record and analysing the data—interpretation! Accountants supervise bookkeepersBookkeeping is mechanical in nature Accounting is the establishment of systems of record and analysing the data—interpretation! Accountants supervise bookkeepers

32. Financial Statements A summary of all the transactions that have occurred over a particular period. Indicate health & stability. Key statements Balance sheet Income statement Statement of Cash Flows

33. The Balance Sheet A firm’s financial condition on specific date (think snapshot) Fundamental Accounting Equation Assets = Liabilities + Owner’s Equity Assets – tangible & intangible Liabilities – accounts payable, notes payable, bonds payable

34. Very Vegetarian: Balance Sheet 12/31/07

35. The Income Statement Summarizes revenues, cost of goods, expenses, total profit or loss during a period Shows net income or net loss for period after all bills are paid

36. Very Vegetarian: Income Statement Year Ending 12/31/07

37. Statement of Cash Flows Summary of incoming and outgoing money, tracks cash receipts and cash payments. Operations Investments Financing

38. Very Vegetarian: Statement of Cash Flows Year Ending 12/31/07

39. Analyzing Statements: Ratio Analysis Calculations and interpretations of firm’s statements Liquidity Ratios : how fast asset converted to cash Leverage (Debt) Ratios : degree of reliance on borrowed funds Profitability (Performance) Ratios: how effective at using resources to achieve profits Activity Ratios: how effective at using available assets

40. How to Read a Corporate Annual Report Read management’s discussion of operations changes Identify strengths or weaknesses Review firm’s consolidated balance sheet (assets, liabilities, equity) Analyze Income Statement Look beyond year for trends Review statement of changes in cash flows Review auditor’s opinion See Learning Goal 2: Define and explain the different areas of the accounting profession. See Learning Goal 5: Explain the importance of ratio analysis in reporting financial information.See Learning Goal 2: Define and explain the different areas of the accounting profession. See Learning Goal 5: Explain the importance of ratio analysis in reporting financial information.

41. “Cooking the Books” Early recognition of revenue Late recognition of expense Inadequate reserves for bad debts, returns and liabilities Changing inventory valuation methods, 1 time boost to income Phony transactions with partnerships Also available on a Transparency Acetate See Learning Goal 2: Define and explain the different areas of the accounting profession. Cooking the Books This slide describes some questionable strategies companies have used when presenting company financial information. Have the students go through each item on the slide and discuss what they mean. The Security and Exchange Commission (SEC) has issued an account bulletin referred to as SAB 101- Revenue Recognition. This issue deals with company’s improperly recording revenue when received on a contract rather than recognizing the revenue over the life of the agreement. According to the SEC, this is the single largest issue involving companies restating their earnings. According to SmartPros.com, “Companies try to boost revenue by manipulating the recognition of revenue. Think about a bottle of wine. You wouldn’t pop the cork on the bottle before it was ready. But some companies are doing this with their revenue – recognizing it before a sale is complete, before the product is delivered to a customer, or at a time when the customer still has options to terminate, void, or delay the sale.” Revenue recognition issues are among the most serious financial reporting problems. When revenue is inappropriately recognized, serious cash flow problems can result. This situation causes stock prices to plummet indefinitely. The SEC recently issued SAB 101 which provides a good framework for companies to follow. The two requirements that must exist for revenue recognition are: Revenue must be realized or realizable and earned. This does not occur until all of the following criteria are met: There is persuasive evidence of an arrangement. Delivery has occurred or services have been rendered. Price is defined or determinable. Collectibles are reasonably assured.Also available on a Transparency Acetate See Learning Goal 2: Define and explain the different areas of the accounting profession. Cooking the Books This slide describes some questionable strategies companies have used when presenting company financial information. Have the students go through each item on the slide and discuss what they mean. The Security and Exchange Commission (SEC) has issued an account bulletin referred to as SAB 101- Revenue Recognition. This issue deals with company’s improperly recording revenue when received on a contract rather than recognizing the revenue over the life of the agreement. According to the SEC, this is the single largest issue involving companies restating their earnings. According to SmartPros.com, “Companies try to boost revenue by manipulating the recognition of revenue. Think about a bottle of wine. You wouldn’t pop the cork on the bottle before it was ready. But some companies are doing this with their revenue – recognizing it before a sale is complete, before the product is delivered to a customer, or at a time when the customer still has options to terminate, void, or delay the sale.” Revenue recognition issues are among the most serious financial reporting problems. When revenue is inappropriately recognized, serious cash flow problems can result. This situation causes stock prices to plummet indefinitely. The SEC recently issued SAB 101 which provides a good framework for companies to follow. The two requirements that must exist for revenue recognition are: Revenue must be realized or realizable and earned. This does not occur until all of the following criteria are met: There is persuasive evidence of an arrangement. Delivery has occurred or services have been rendered. Price is defined or determinable. Collectibles are reasonably assured.

42. 5 Ways to Avoid More Enron’s Bring hidden liabilities back onto balance sheet Highlight things that matter List risks and assumptions built into numbers Standardize operating income Provide aid in figuring free-cash flow Also available on a Transparency Acetate See Learning Goal 2: Define and explain the different areas of the accounting profession. 5 Ways to Avoid More Enrons This slide presents five improvements that could help avoid more Enron like situations. Currently, a company can have Special Purpose Entities (SPEs) where billions of off-balance sheet debt can be hidden. If a company can find an investor who puts in 3% of the SPE, it can be removed from the company’s balance sheet. Anything less than 5 or 10% of earnings or assets was considered “immaterial” to overall performance and could be left out of the statements. For example, Tyco acquired hundreds of companies in three years prior to 2002 totaling over $8 billion but did not identify the specifics because each individual acquisition fell below the threshold. Transparency of risks and assumptions in numbers should be present. Pro forma operating earnings are not standardized and they are left up to companies as to what to include or exclude. How much free cash flow a company would earn is a guessing game and left up to different interpretations. (Source: Business Week, February 18, 2002)Also available on a Transparency Acetate See Learning Goal 2: Define and explain the different areas of the accounting profession. 5 Ways to Avoid More Enrons This slide presents five improvements that could help avoid more Enron like situations. Currently, a company can have Special Purpose Entities (SPEs) where billions of off-balance sheet debt can be hidden. If a company can find an investor who puts in 3% of the SPE, it can be removed from the company’s balance sheet. Anything less than 5 or 10% of earnings or assets was considered “immaterial” to overall performance and could be left out of the statements. For example, Tyco acquired hundreds of companies in three years prior to 2002 totaling over $8 billion but did not identify the specifics because each individual acquisition fell below the threshold. Transparency of risks and assumptions in numbers should be present. Pro forma operating earnings are not standardized and they are left up to companies as to what to include or exclude. How much free cash flow a company would earn is a guessing game and left up to different interpretations. (Source: Business Week, February 18, 2002)

43. What is the major value of ratio analysis to the firm?

44. Current Ratio : It is the relationship between the current assets and current liabilities of a concern. Current Ratio = Current Assets/Current Liabilities If the Current Assets and Current Liabilities of a concern are Rs.4,00,000 and Rs.2,00,000 respectively, then the Current Ratio will be : Rs.4,00,000/Rs.2,00,000 = 2 : 1 The ideal Current Ratio preferred by Banks is 1.33 : 1 Net Working Capital : This is worked out as surplus of Long Term Sources over Long Tern Uses, alternatively it is the difference of Current Assets and Current Liabilities. NWC = Current Assets – Current Liabilities

48. Business Overview II Financial Management

49. Finance & Financial Managers Finance: the function in a business that acquires and manages funds for the firm. Financial Management: managing a firm’s resources so it can meet goals and objectives. Financial Managers: make recommendations to top executives regarding strategies for improving the financial strength of a firm.

50. What Financial Mgrs do…

51. Most common financial failures Undercapitalization Poor control over cash flow Inadequate expense control

52. Financial Planning

53. Budget Process Financial plan- financial statements Types of budgets Capital Cash Operating (Master) Financial controls- feedback

54. Very Vegetarian: Monthly Cash Budget

55. Need for Operating Funds Manage daily operations Control credit operations Acquire inventory Determine capital expenditures See Learning Goal 3: Explain the major reasons why firms need operating funds, and identify various types of financing that can be used to obtain those funds. See text pages: 491See Learning Goal 3: Explain the major reasons why firms need operating funds, and identify various types of financing that can be used to obtain those funds. See text pages: 491

56. Why Firms Need Funds Short-Term Funds Meeting monthly expenses Unanticipated emergencies Cash-flow problems Expanding current inventory Temporary promotional programs Long-Term Funds New product development Replacing capital expenditure Mergers or acquisitions Expansion into new markets Building new facilities See Learning Goal 3: Explain the major reasons why firms need operating funds, and identify various types of financing that can be used to obtain those funds. See text pages: 494See Learning Goal 3: Explain the major reasons why firms need operating funds, and identify various types of financing that can be used to obtain those funds. See text pages: 494

57. Types of Short-term Funds Trade Credit Promissory Note Short term Loans (secured, unsecured, line of credit, revolving credit) Factoring Accounts Receivables Commercial Paper Credit Cards

58. Types of Long-term Funds Debt Financing Term-loan agreement Issuing bonds Equity Financing sell stock retained earnings venture capital

59. What is leverage, and why would firms choose to use it?

60. Why do firms generally prefer to borrow funds rather than issue shares of stock to obtain long-term financing?

61. Week 5 Articles & Assignments

62. Articles

63. Peek @ Week 6

64. Topics Ethics and Strategy Explain the importance of ethics and social responsibility in business. Create an awareness of your values.

65. Deliverables Current Event Article to Share Divide ERR Articles to present Atchison, B. K. (2004, January). Ethics, governance, trust, transparency and customer relations. Geneva Papers on Risk & Insurance - Issues & Practice, 29(1), 40. Bartkowiak, G. (2006). Practical aspects of a social responsibility in business. Dialogue & Universalism, 16(5/6), 133. Caldwell, C., Hayes, L. A., Bernal, P., & Karri, R. (2008, March). Ethical stewardship - Implications for leadership and trust. Journal of Business Ethics, 78(1-2), 153. Carson, T. L. (2003, April). Self-interest and business ethics: Some lessons of the recent corporate scandals. Journal of Business Ethics, 43(4), 389. Nonis, S., & Swift, C. O. (2001, May/June). Personal value profiles and ethical business decisions. Journal of Education for Business, 76(5), 251. Stoll, M. (2008, March). Backlash hits business ethics: Finding effective strategies for communicating the importance of corporate social responsibility. Journal of Business Ethics, 78(1/2), 17.

66. Individual Assignments Ethics Awareness Self Assessment SEOCS – Student End of Course Survey

67. Individual Assignment – Personal Values Reflect on the Williams Institute Ethics Awareness Inventory self-assessment and your personal values. Then, consider what Kudler Fine Foods appears to value as an organization. In no more than 1,050 words, write a paper identifying your values, how those values align with the values of Kudler Fine Foods, and how this would affect your performance if you were a manager there.

68. Wrap Up & Final Questions Individual Paper Feedback

69. References  Nickels, W., McHugh, J., & McHugh, S. (2008). Understanding business (8th ed.). New York: McGraw-Hill. 

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