1 Introduction to Business in the United States CHAPTER F1 © 2007 Pearson Custom Publishing

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Introduction to Introduction to Business in the Business in the United StatesUnited States

CHAPTER F1

© 2007 Pearson Custom © 2007 Pearson Custom PublishingPublishing

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Business (biz’nis), n. Business (biz’nis), n. 1. One’s work or occupation.1. One’s work or occupation.

2. A special task or duty.2. A special task or duty.

3. A matter or affair.3. A matter or affair.

4. Commerce or trade.4. Commerce or trade.

5. A commercial or industrial 5. A commercial or industrial establishment. establishment.

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Learning Objective 1:Learning Objective 1:

Describe the four Describe the four factors of productionfactors of production


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Factors of ProductionFactors of Production Natural resourcesNatural resources

land, timber, oil, metals, water, etc.land, timber, oil, metals, water, etc.

Labor– the human resource factor

Capital– money, buildings, equipment, tools, etc.

Entrepreneurship– the art of starting and running a

business


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Explain the basic Explain the basic concepts of capitalism concepts of capitalism and how they relate to and how they relate to

the profit motive.the profit motive.


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In a In a planned economyplanned economy, the , the government generally controls all government generally controls all or most of the factors of or most of the factors of production.production.

Communism is the classic Communism is the classic example of a planned economy.example of a planned economy.


Planned EconomiesPlanned Economies

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Market EconomiesMarket Economies In a In a market economymarket economy, competition , competition

within the marketplace is considered within the marketplace is considered crucial to achieve efficiency in the crucial to achieve efficiency in the allocation of resources (the factors of allocation of resources (the factors of production).production).

Capitalism is the classic example of a Capitalism is the classic example of a market economy, also called “free market economy, also called “free enterprise,” “free market,” or a “private enterprise,” “free market,” or a “private enterprise” system.enterprise” system.


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Profit MotiveProfit Motive

To understand the profit motive you To understand the profit motive you need to understand the basics of need to understand the basics of Cost-Cost-Benefit Analysis.Benefit Analysis.

Virtually all activities or actions involve Virtually all activities or actions involve a a “cost,”“cost,” monetary or otherwise. monetary or otherwise.

Most activities or actions have the Most activities or actions have the potential for potential for “benefit,”“benefit,” again not again not necessarily monetary.necessarily monetary.


Cost-Benefit AnalysisCost-Benefit Analysis

Without extenuating circumstances, a Without extenuating circumstances, a person will generally do something person will generally do something only if the expected benefits are at least only if the expected benefits are at least equal to the estimated costs or equal to the estimated costs or sacrifice.sacrifice.

If the benefits were equal to the cost, If the benefits were equal to the cost, you would have a you would have a Break-evenBreak-even situation.situation.

When the benefits exceed the costs, When the benefits exceed the costs, you have a you have a ProfitProfit..


Definitions of “Profit” Definitions of “Profit” TermsTerms

““Profit”Profit” is the excess of benefit over is the excess of benefit over cost.cost.

““Gross Profit”Gross Profit” is the difference is the difference between the cost to buy an item and between the cost to buy an item and the price charged when selling the the price charged when selling the item (i.e., “markup”).item (i.e., “markup”).

““Net Profit”Net Profit” or or “Net Income”“Net Income” is the is the final profit after subtracting all final profit after subtracting all legitimate costs of doing business legitimate costs of doing business from the sales and other inflows into from the sales and other inflows into the business.the business.

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Explain the basic issues in Explain the basic issues in the debate over whether the debate over whether businesses have a social businesses have a social

responsibility.responsibility.



Social Responsibility of Social Responsibility of BusinessBusiness

Many companies are displaying an Many companies are displaying an increasing awareness of their increasing awareness of their responsibility with regard to social responsibility with regard to social and environmental concerns.and environmental concerns.

An example of this would An example of this would

be the increased awareness be the increased awareness

of the “green” companies, those that of the “green” companies, those that are environmentally friendly.are environmentally friendly.


StakeholdersStakeholders

A A stakeholderstakeholder is anyone who is is anyone who is affected by the way that a affected by the way that a company operates and the company operates and the decisions that are made inside decisions that are made inside that company. A company owes a that company. A company owes a responsibility to the stakeholders.responsibility to the stakeholders.

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Distinguish among the Distinguish among the three basic forms of three basic forms of

business organization business organization and describe the and describe the advantages and advantages and

disadvantages of each.disadvantages of each.© 2007 Pearson Custom Publishing© 2007 Pearson Custom Publishing


Forms of Business Forms of Business OrganizationsOrganizations

Sole ProprietorshipsSole Proprietorships: : An An unincorporated business owned by a unincorporated business owned by a single individual. single individual.

Not necessarily a small business. The Not necessarily a small business. The vast majority of U.S. businesses are vast majority of U.S. businesses are sole proprietorships.sole proprietorships.


Proprietorship Proprietorship AdvantagesAdvantages

Easy and inexpensive to set up.Easy and inexpensive to set up. No sharing of profits.No sharing of profits. Total control.Total control. Few government regulations.Few government regulations. No special income taxes.No special income taxes. Easy and inexpensive to dissolve.Easy and inexpensive to dissolve.


Proprietorship Proprietorship DisadvantagesDisadvantages

Unlimited liability.Unlimited liability. Limited access to capital or money.Limited access to capital or money. Limited management expertise.Limited management expertise. Personal time commitment.Personal time commitment. Limited life.Limited life.


Forms of Business Forms of Business OrganizationsOrganizations

Partnerships:Partnerships: An unincorporated An unincorporated business with two or more owners. business with two or more owners.

Most public accounting firms are Most public accounting firms are partnerships. Many professional sports partnerships. Many professional sports teams are partnerships, such as the teams are partnerships, such as the Boston Celtics.Boston Celtics.


Partnership Partnership AdvantagesAdvantages

Easy to form.Easy to form. Increased management expertise.Increased management expertise. Access to more capital.Access to more capital. Few government regulations.Few government regulations. No special income taxes.No special income taxes. Greater business continuity.Greater business continuity.


Partnership Partnership DisadvantagesDisadvantages

Unlimited liability.Unlimited liability. Sharing of profits.Sharing of profits. Difficulty in dissolving.Difficulty in dissolving. Potential conflicts between Potential conflicts between

partners.partners.


Separate Entity Separate Entity AssumptionAssumption

For proper accounting to occur, For proper accounting to occur, business events and transactions business events and transactions must be separated from the must be separated from the personal events and transactions personal events and transactions of the owners. This is true for all of the owners. This is true for all forms of business organizations.forms of business organizations.


Separate Entity Separate Entity AssumptionAssumption

Do not confuse a Do not confuse a separate separate accounting entityaccounting entity with a with a separate legal entityseparate legal entity. Only . Only corporations are legally separate corporations are legally separate from their owners.from their owners.

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The Corporate FormThe Corporate Form

A corporation is an A corporation is an “artificial being,”“artificial being,” a legal entity separate and apart from a legal entity separate and apart from the owners (stockholders). A the owners (stockholders). A corporation can sue, and be sued. A corporation can sue, and be sued. A corporation can buy, own, and sell corporation can buy, own, and sell property.property.

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Corporation AdvantagesCorporation Advantages

Limited liability.Limited liability. Greater access to Greater access to

capital.capital. Easy transferability of Easy transferability of

ownership.ownership. Continuity of life.Continuity of life. Greater management Greater management

expertise.expertise.

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Corporation Corporation DisadvantagesDisadvantages

Greater tax burdenGreater tax burden (double (double

taxation).taxation). Greater Greater

governmental governmental regulation.regulation.

Absentee Absentee ownership. ownership.


Other Business FormsOther Business Forms

Limited partnershipLimited partnership:: at least one at least one general partner with unlimited liability.general partner with unlimited liability.

Limited liability partnership (LLP)Limited liability partnership (LLP):: the the liability of the general partner is limited.liability of the general partner is limited.

Limited liability company (LLC)Limited liability company (LLC):: stockholders still enjoy the limited stockholders still enjoy the limited liability of a corporation, but they are liability of a corporation, but they are taxed as if they are partners (no double taxed as if they are partners (no double taxation).taxation).


Discussion QuestionDiscussion Question

Imagine that you have the opportunity Imagine that you have the opportunity to start a company. Would you prefer to start a company. Would you prefer to be an owner (or part owner) of a to be an owner (or part owner) of a proprietorship, partnership, or proprietorship, partnership, or corporation? Cite specific reasons for corporation? Cite specific reasons for your choice.your choice.

Follow-up: Want to learn more about Follow-up: Want to learn more about starting a corporation? Try using the starting a corporation? Try using the Internet site Internet site www.delawareinc.comwww.delawareinc.com to to see how easy it is to set up a corporation see how easy it is to set up a corporation in that state.in that state.

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Distinguish among the Distinguish among the three major types of three major types of

business activities and business activities and define hybrid define hybrid businesses. businesses.



Types of BusinessesTypes of Businesses

Manufacturing CompaniesManufacturing Companies Merchandising CompaniesMerchandising Companies

Wholesalers and RetailersWholesalers and Retailers Service CompaniesService Companies Hybrid CompaniesHybrid Companies

Some combination of the aboveSome combination of the above

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Explain the basic need Explain the basic need for international for international

business trade and the business trade and the complications involved complications involved

in this activity.in this activity.



Global Nature of Global Nature of BusinessBusiness

Many businesses operate Many businesses operate within what is called the within what is called the global global economyeconomy..

Imports, exports, and theImports, exports, and the “balance of trade”“balance of trade” are all are all important factors in important factors in

determining a nation’s determining a nation’s

economic health.economic health.


Economic Economic ComplicationsComplications

Companies involved in international Companies involved in international trade are often faced with many trade are often faced with many potential conflicts.potential conflicts.

Different currencies used around the Different currencies used around the world can cause problems in world can cause problems in determining the “value” of a deal determining the “value” of a deal between two companies. Currency between two companies. Currency must be “translated” or converted.must be “translated” or converted.


Political ComplicationsPolitical Complications

Many countries impose Many countries impose quotasquotas to to limit imports. limit imports.

Some countries impose Some countries impose tariffs tariffs on on imports to raise tax revenue and imports to raise tax revenue and also to increase prices of imported also to increase prices of imported goods in relation to domestic goods in relation to domestic goods.goods.

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Define accounting and Define accounting and distinguish among the distinguish among the

different roles of different roles of accountants.accountants.



Accounting in the Accounting in the Business EnvironmentBusiness Environment

The purpose of The purpose of accounting is to accounting is to provide useful provide useful information to information to decision makers.decision makers.


Definition of Definition of AccountingAccounting

Accounting is a system for Accounting is a system for analyzinganalyzing and and recordingrecording business transaction, business transaction, transformingtransforming the resultant data into the resultant data into information useful for decision information useful for decision making, and making, and reportingreporting to the proper to the proper stakeholders.stakeholders.


Internal vs. External Internal vs. External Decision MakersDecision Makers

Internal: People within the organization Internal: People within the organization who make decisions who make decisions for the companyfor the company with almost with almost unlimitedunlimited information information..

External: People outside the organization External: People outside the organization who make decisions who make decisions about the companyabout the company with with limitedlimited information. information.


Financial vs. Financial vs. Management Management AccountingAccounting

Financial: Provides historical financial Financial: Provides historical financial information to internal and external information to internal and external stakeholdersstakeholders..

Management: Provides detailed financial Management: Provides detailed financial and non-financial information to internal and non-financial information to internal decision makers.decision makers.


AccountantAccountant

An information specialist who An information specialist who provides a variety of accounting provides a variety of accounting and consultation services to and consultation services to businesses and individuals.businesses and individuals.


Development of the Development of the Accounting Accounting ProfessionProfession

The stock market crash of 1929 created The stock market crash of 1929 created a need for investors and lenders to make a need for investors and lenders to make prudent decisions about companies.prudent decisions about companies.

Congress enacted the Congress enacted the Securities Act of Securities Act of 19331933 and the and the Securities Exchange Act of Securities Exchange Act of 19341934 creating the Securities and creating the Securities and Exchange Commission (SEC).Exchange Commission (SEC).


The SECThe SEC

Congress gave the SEC the Congress gave the SEC the authorityauthority to to establish accounting principles.establish accounting principles.

The SEC The SEC delegateddelegated the authority to the authority to establish accounting principles to the establish accounting principles to the accounting profession through the accounting profession through the Financial Accounting Standards Board Financial Accounting Standards Board (FASB).(FASB).


Standards for Standards for Financial ReportingFinancial Reporting

Accounting is dynamic and Accounting is dynamic and changes with the natural evolution changes with the natural evolution of business and technology. of business and technology.

FASB continues to focus on issues FASB continues to focus on issues that affect financial reporting and that affect financial reporting and the needs of financial report users, the needs of financial report users, under the watchful eye of the SEC.under the watchful eye of the SEC.


What is GAAP?What is GAAP? Guidelines for presentation of financial Guidelines for presentation of financial

accounting information designed to accounting information designed to serve external decision makers’ need serve external decision makers’ need for consistent and comparable for consistent and comparable information are known as information are known as Generally Generally Accepted Accounting Principles Accepted Accounting Principles (GAAP)(GAAP)..

Only Only pubicpubic companies must conform to companies must conform to GAAP.GAAP.


““Publicly traded”Publicly traded” stock is listed on stock is listed on one of the national or regional one of the national or regional stock exchanges. stock exchanges.

Most banks and other lenders or Most banks and other lenders or creditors also request that financial creditors also request that financial statements be prepared in statements be prepared in accordance with GAAP.accordance with GAAP.

Who Is Bound by Who Is Bound by GAAP?GAAP?


International Standards International Standards for Financial Reportingfor Financial Reporting The The International Accounting International Accounting

Standards BoardStandards Board (IASB) is (IASB) is responsible for development of responsible for development of international accounting international accounting standards. standards.

The IASB and the FASB work The IASB and the FASB work together to develop a unified together to develop a unified global set of standards.global set of standards.


Accounting is a Accounting is a ProfessionProfession

Accounting is a profession as Accounting is a profession as evidenced by :evidenced by : a strict code of ethics a strict code of ethics code of professional conduct code of professional conduct continuing professional educationcontinuing professional education licensing by a governmental unit.licensing by a governmental unit.


Certified Public Certified Public AccountantAccountant

An individual who meets An individual who meets educational and professional educational and professional criteria to be licensed by a state criteria to be licensed by a state board of accountancy.board of accountancy.


Accountants’ RolesAccountants’ Roles

Assurance ServicesAssurance Services TaxationTaxation Consulting ServicesConsulting Services Management AccountingManagement Accounting


Assurances ServicesAssurances Services

Requires Requires independence independence of the accountant of the accountant in fact and appearance.in fact and appearance.

AttestationAttestation: evaluation of one party’s : evaluation of one party’s assertion to a third party.assertion to a third party.

AuditingAuditing: process of gathering objective : process of gathering objective evidence, evaluating the evidence against evidence, evaluating the evidence against specific criteria, and reporting the results specific criteria, and reporting the results to users of information.to users of information.


Financial Statement Financial Statement AuditAudit

An examination by an independent An examination by an independent CPA of enough of a company’s CPA of enough of a company’s records to determine whether the records to determine whether the financial statements were prepared financial statements were prepared in accordance with GAAPin accordance with GAAP and and demonstrate a fair representation of demonstrate a fair representation of the company’s financial conditionthe company’s financial condition..


TaxationTaxation

CPAs help individuals and CPAs help individuals and businesses legally minimize tax businesses legally minimize tax assessments.assessments.

CPAs represent clients in matters CPAs represent clients in matters before IRS and state and local taxing before IRS and state and local taxing agents.agents.


Consulting ServicesConsulting Services

CPA provides data, decision CPA provides data, decision information, and other advice to information, and other advice to help the client manage the help the client manage the business.business.

Requires expertise in a number Requires expertise in a number of business subjects.of business subjects.


Management AccountingManagement Accounting

A chief financial officer (CFO) is the A chief financial officer (CFO) is the highest level of management highest level of management accountant who directs the firm’s accountant who directs the firm’s financial affairs. financial affairs.

Cost accounting is a narrow Cost accounting is a narrow application of management accounting application of management accounting to determine the cost of a to determine the cost of a manufactured product.manufactured product.


Accountants’ Accountants’ ResponsibilitiesResponsibilities

Accountants with certifications must:Accountants with certifications must: Maintain expertise with continuing Maintain expertise with continuing

education.education. Maintain high ethical standards.Maintain high ethical standards. Meet their legal responsibilities to their Meet their legal responsibilities to their

clients and third parties who rely on clients and third parties who rely on financial information associated with the financial information associated with the CPA.CPA.

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End of Chapter F1

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1 Introduction to Business in the United States CHAPTER F1 © 2007 Pearson Custom Publishing