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Fashion Business Practices Midterm Review
Key Terms and Ideas
124
Business
Undergraduate 1
10/09/2014

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Term
Business
Definition
the organized effort of individuals to produce and sell for a profit, the goods and services that satisfy a society's needs
Term
Profit
Definition
after all business expenses are deducted from sales revenues
Term
What are the four kinds off resources business owners combine?
Definition
1.Materials
2.Human Resources
3.Financial Resources
4.Informational Resources
Term
Materials
Definition
raw materials used in manufacturing
Term
Human resources
Definition
people whi furnish labor in return for busisness
Term
Financial resources
Definition
money required to pay employees, purchase materials, keep business operating
Term
Informational resources
Definition
tells managers how effectively resources are being combined and used
Term
What are the four business classifications?
Definition
Manufacturing
•  Service Business
•  Marketing Intermediaries (retailers)
•  Consumers
Term
Economics
Definition
the study of how wealth is created and distributed
Term
Wealth
Definition
anything of value
Term
Distributed
Definition
“who gets what”
Term
Economic System
Definition
the combination of policies and choices made by a nation regarding ownership of capital and where economic decisions are made
Term
Factors of Production
Definition
resources used in the creation of goods and services
Term
What are the factors of production?
Definition
Natural Resources: land, water, minerals •  Labor: human resources •  Capital: money •  Entrepreneurship: willingness to take risks and ability to use other factors efficiently
Term
What are the two types of economic systems?
Definition
Market Economies & Planned Economies
Term
Capitalism (market economy)
Definition
Driven by profit motive and competition - Individuals own and operate majority of business - Market defined as laissez faire = “let them do”
Free market economy where individuals make decisions about what to product, market and pricing
Term
Planned Economies (Command Economies):
Definition
Communism: economic system where private property is eliminated and government owns all the major forms of production and makes all economic decisions -  Socialism: economic system where government owns and operates major industries or sectors in the economy
Term
Mixed Economies:
Definition
blend characteristics of planned and market economies - private enterprise and government involvement - USA, UK have a mixed economy
Term
How do we measure our Economic Performance?
Definition
Access Productivity (average level of output per worker) •  GDP – Gross Domestic Product – total dollar value of all goods and services produced by all people within the boundaries of a country during one year period •  The gross domestic product (GDP) is the primary indicator used to gauge the health of a country's economy
Term
Business Cycle?
Definition
Prosperity: income high, unemployment low, expansion, prices high •  Recession – 2-3 months of decline in GDP, price discounting, unemployment •  Depression – Severe recession, high unemployment •  Recovery
Term
What is UNDER Employment?
Definition
Underemployment refers to an employment situation that is insufficient in some important way for the worker, relative to a standard. Examples include holding a part-time job despite desiring full- time work, and overqualification, where the employee has education, experience, or skills beyond the requirements of the job.
Term
Inflation:
Definition
general rise in prices
Term
Monetary Policy
Definition
Federal reserve’s decisions that determine the supply of money and interest rate
The actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates
Term
Fiscal Policy
Definition
Government influence on the amount of savings and expenditures, (tax structures, government spending)
Government spending policies that influence macroeconomic conditions. These policies affect tax rates, interest rates and government spending, in an effort to control the economy. • Fiscal measures are frequently used in tandem with monetary policy to achieve certain goals
Term
National Debt
Definition
total of all federal deficit
Term
Sole Proprietorship
Definition
Owned by one person, easiest to start, most large corporations started as sole •  Un-incorporated
Term
What are the advantages of a Sole proprietorship?
Definition
Retail all profits Ease start up Flexibililty Tax advantage (corps are taxed twice) Secrecy (not required to reveal profits)
Term
What are the disadvantages of a sole proprietorship?
Definition
Unlimited Liability: business owner is responsible for all debts Lack of Money (banks unwilling to lend) Limited Management Skills Difficulty in Hiring Employees
Term
Partnership
Definition
Two or more persons act as co-owners for a profit
Term
General partner
Definition
unlimited liability
assumes managment role
Term
Limited partner
Definition
liability limited to investment
may not take active managerial role
Term
What are the advantages of a partnership
Definition
Ease of Start up Availability of Capital and Credit Retain all profits, taxed 1x Combine skills of partners
Term
What are the disadvantages of a partnership?
Definition
Unlimited Liability (if not incorporated) Management Disagreements
Term
Corporation
Definition
Legal entity that functions separate and apart from its owners.
Term
Corporate Charter
Definition
legal document that formally establishes a corporation
Term
Stockholders:
Definition
owners of a corporation
Term
Board of Directors:
Definition
legal governing body of the corporation
Term
What are the advantages of corporation?
Definition
Limited Liability: creditors claims are on assets of corp, not of owners Easy to Raise money (sell shares of stocks) Easy to Transfer Ownership (shares sold/ bought) Specialized Management (can use stock to motivate managers/employees
Term
What are the disadvantages of a corporation?
Definition
Legal Issues (complex to form) Government Regulations (file reports on operations, finance) Double Taxation: corp pays tax, owners pay tax on profits Lack of Secrecy for public corporations
Term
What are the types of corporation?
Definition
Private, Public, S-Corp, LLC, not for profit, joint venture
Term
Private Corporation
Definition
stock is held by a few people and not available for sale to public
Term
Public Corporation
Definition
stock is traded on stock exchange and bought and sold by investors
Term
S-Corp:
Definition
benefits of incorporation, yet taxed at lower rate applied to sole prop, and partnerships. (small businesses, Drs, athletes)
Term
LLC:
Definition
Limited Liability Corp: Hybrid of publicly held corp and partnership; allows business to choose whether to be taxed as partnership or corporation (provides limited liability protection)
Term
NOT FOR PROFIT CORP:
Definition
A nonprofit organization (NPO) is an organization that uses surplus revenues to achieve its goals rather than distributing them as profit or dividends
Term
Joint Venture:
Definition
two or more organizations collaborate on a project for mutual gain
Term
What are some ways of corporate growth?
Definition
•  Internal Growth: new stores, new lines, etc. •  Merger / Acquisition
Term
Merger
Definition
union of two corporations to form a new corporation
Term
Acquisition
Definition
Acquisition
Term
takeover or buyout
Definition
the purchase of one organization by another
Term
Hostile Merger
Definition
company being acquired does not want to be bought
Term
Horizontal Merger
Definition
joining of two firms in same industry
Term
Vertical Merger:
Definition
joining of two firms in different stages of related industry
Term
Conglomerate Merger
Definition
joining of two firms in unrelated industries
Term
LBO – Leveraged Buy Out:
Definition
allows a firm’s managers or group of investors to purchase a company, using the assets of the purchased company to guarantee repayment of a loan •  The purpose of LBO’s is to allow companies to make large acquisitions without having to commit a lot of capita
Term
Competition
Definition
A rivalry among businesses for customers and sales
Term
Supply
Definition
quantity of product or service that producers are able and willing to sell •
Term
Demand
Definition
quantity of product or service that buyers are able and willing to purchase
Term
Market Price
Definition
profit maximizing price at which the quantity of goods demanded and the quantity of goods supplied are equal
Term
Pure Competition
Definition
many buyers, many sellers producing a product; no one is powerful enough to affect price •
Term
Monopolistic Competition
Definition
many buyers, relatively large amount of sellers trying to differentiate their product from those of competitors •
Term
Oligopoly
Definition
few sellers, with the power to influence the price of their product
Term
What are the degrees of competition?
Definition
Pure competition, monoploistic competition, oligopoly, monopoly
Term
Monopoly:
Definition
One producer/ seller, which can therefore set the prices of its products
Term
Natural Monopoly
Definition
Industry in which one company can most efficiently supply all needed goods or services
Term
FTC
Definition
Federal Trade Commission – investigates illegal trade practices, enforces antitrust laws (fair competition)
Term
EEOC
Definition
Equal Employment Opportunity Commission: regulates discrimination in employment practices •
Term
SEC
Definition
Securities Exchange Commission: regulates corporate securities •
Term
FDA
Definition
Food and Drug Administration: protects consumers and regulates food and drug safety •
Term
FCC:
Definition
Federal Communications Commission, regulates radio, TV, telephone communications
Term
What are the government laws encouraging competition?
Definition
Sherman Antitrust Act. The Clayton Act
Term
Sherman Antitrust Act
Definition
encourages competition, prevents monopolies. Prohibits Price Fixing (agreement between 2 businesses about pricing) Market Allocation (agreement to divide a market among potential customers) •
Term
The Clayton Act
Definition
prohibits Price Discrimination, Tying Agreements and other unfair practices.
Term
Deregulation
Definition
movement to remove existing government regulations and reduce the rate at which new regulations are enacted
Term
Why do firms need money?
Definition
To start up and keep rolling
Term
What is financial management?
Definition
All the activities concerned with obtaining money and using it effectively.
Term
How does effective financial management begin?
Definition
Planning
Term
What is a financial plan?
Definition
document that specifies the funds a firm will need for a period of time, the timing of inflows and outflows, and the most appropriate sources and uses of funds
Term
On what is a financial plan based?
Definition
Based on forecasts of production costs, purchasing needs, and expected sales activities for the time period covered
Term
Why do organizations need funds?
Definition
to run day-to- day operations, compensate employees and hire new ones, pay for inventory, make interest payments on loans, pay dividends to shareholders, and purchase property, facilities, and equipment
Term
What are the two basic sources of Funds?
Definition
Debt and equity capital
Term
Why would a company NEED short term financing:
Definition
revenues low >cash flow problems (movement of $, accounts receivable less than accounts payable) >Inventory >Monthly Expenses >Speculative Production: time lag between actual production of goods and when goods are sold. >Short Term Promotional Needs >Unexpected Emergencies
Term
What are the sources of unsecured short term financing?
Definition
Trade credit, promissory note, unsecured bank loan (with interest)
Term
WHat are the sources of secured short term financing?
Definition
LOANS secured by Inventory (using finished merchandise, raw materials or work in process inventories as collateral for a loan)
>LOANS secured by Receivables (accounts receivable are amounts owed to firm by customers) A firm can use this as collateral for short term financing.
> FACTORING Accounts Receivable
Term
What is Factoring?
Definition
Factoring is the purchase of valid Commercial Accounts Receivable [AR] for cash.
Term
Is factoring only used only by companies in financial “trouble”?
Definition
Factoring gives your business the power to grow, without giving away equity or taking on debt. Contrary to what you may have heard, factoring is NOT a tool used only by struggling companies. Financially smart companies use factoring as a powerful tool to release capital tied up in AR.
Term
How is factoring different from a loan, say from a bank? Do I have to sign a Personal Guarantee?
Definition
Factoring is not a loan; it is the process of purchasing valid Commercial AR [invoices] from your business at a small discount. Unlike most banks and other factors, there is NO personal guarantee required with our professional funding services.
Term
Why do companies need LONG TERM financing?:
Definition
>Business Start Up Costs >Mergers, expansion, (new store openings) >New Product Development (new lines, etc) >Long Term marketing Activities >Replacement of Equipment >Expansion of facilities
Term
WHat are the sources of Equity financing?
Definition
Retain earnings, selling stock
Term
Venture capitalists
Definition
se money from wealthy individuals and institutional investors and invest these funds in promising firms •  Also provide management consulting advice •  Become part owners
Term
Why do companies need debt financing?
Definition
Not always signifies weakness. Companies can use debt financing for same reasons as long term borrowing or for….
Term
Financial Leverage
Definition
use of borrowed funds to increase return on owners equity
Term
What is the key to managing leverage?
Definition
ensuring that the company’s earnings remain larger than its interest payments, which increases the leverage on the rate of return on shareholders’ investment
Term
Long Term Loans
Definition
note that requires a borrower to repay a loan in a monthly, quarterly semiannual or annual installment •
Term
Corporate Bonds
Definition
corporations written pledge that it will replay a specified amount of money with interest
Term
registered bond
Definition
registerid in owner’s name by issuing company
Term
debenture bond
Definition
backed by REPUTATION of the corporation.
Term
What are the two types of corporate bonds?
Definition
registered, debenture
Term
What are the four investmental alternatives?
Definition
1.  BANK ACCOUNTS (most liquid, short term, east to get your money back 2.  STOCKS 3.  BONDS 4.  MUTUAL FUNDS
Term
What are the two types of stock?
Definition
Common stock and preferred stock
Term
COMMON STOCK
Definition
ELECT BOARD OF DIRECTORS - VOTE ON ISSUES
Term
PREFERRED STOCK
Definition
- Different rights - get paid dividends first
Term
CAPITAL GAINS
Definition
Increased value of stock
Term
Dividends
Definition
PROFIT
Term
Dividend payments
Definition
cash payments to stockholders as the result of a distribution of the company’s profits
Term
SUPPLY and DEMAND •
Definition
change every day as a result of market forces
Term
What makes people like one particular stock, yet dislike another
Definition
NEWS that is positive or negative for a company.
Term
What are factors that investors look at?
Definition
Sales, earnings, P/E ratio, market capitalization
Term
What is MARKET CAPITALIZATION?
Definition
The total dollar market value of all of a company's outstanding shares; calculated by multiplying a company's shares outstanding by the current market price of one share
Term
BULL MARKET
Definition
average stock price is increasing -
Term
- BEAR MARKET
Definition
Average stock price is decreasing -
Term
Stock splits
Definition
a division of each outstanding share of stock into a greater number of shares to reduce the stock price to a price range that management feels is attractive for the stock.
Term
P.E. RATIO
Definition
PRICE TO EARNINGS RATIO
Shows the relationship between a stock price and its company’s earnings (or profits) per share of stock. This ratio expresses the stock price in terms of EARNINGS PER SHARE. P/E ratio uses earnings of a company to value that company’s stock
Term
What does P/E mean for Investors?
Definition
high P/E means higher earnings growth in the future; shows how much investors are willing to pay per dollar of earnings
Term
BUYING STOCK ON MARGIN:
Definition
Borrow money to buy stock. High risk. If your stock takes a loss – you still have to pay back the loan plus interest.
Term
Primary Market:
Definition
Companies sell the stock to the public…via Financial Institution
Term
I.P.O.
Definition
INITIAL PUBLIC OFFERING First time company offers stock to public. Company “goes public”
Term
Securities Exchanges
Definition
-NYSE (New York Stock Exchange)
b
Term
OTC – Over the Counter
Definition
Electronic network of brokers, NASDAQ
Term
INSIDER TRADING
Definition
Insiders use private company information to further their own fortunes or those of their family and friends.
Term
Bonds: IOU
Definition
Bonds are a form of indebtedness that is sold to the public in set increments, normally in the neighborhood of $1,000. In return for loaning the debtor the money, the lender gets a piece of paper that stipulates how much was lent, the agreed-upon interest rate, how often interest will be paid, and the term of the loan.
Term
WHat are the different types of bonds
Definition
CORPORATE BONDS (higher risk than govt) - GOVERNMENT BONDS - JUNK BONDS (high risk, high yield)
Term
Government Bonds:
Definition
. Savings Bond, (Federal) b. Municipal Bonds (State & Local Govt.) c. Treasuries:
Term
stock index or stock market index
Definition
a method of measuring the value of a section of the stock market. It is computed from the prices of selected stocks (sometimes a weighted average). It is a tool used by investors and financial managers to describe the market, and to compare the return on specific investments.
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