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

2 Business (biz’nis), n. 1. One’s work or occupation. 2. A special task or duty. 3. A matter or affair. 4. Commerce or trade. 5. A commercial or industrial establishment. © 2007 Pearson Custom Publishing

3 Learning Objective 1: Describe the four factors of production © 2007 Pearson Custom Publishing

4 Factors of Production Natural resources Natural resources land, timber, oil, metals, water, etc. land, timber, oil, metals, water, etc. 4 Labor –the human resource factor 4 Capital –money, buildings, equipment, tools, etc. 4 Entrepreneurship –the art of starting and running a business © 2007 Pearson Custom Publishing

5 Learning Objective 2: Explain the basic concepts of capitalism and how they relate to the profit motive. © 2007 Pearson Custom Publishing

6 In a planned economy, the government generally controls all or most of the factors of production. In a planned economy, the government generally controls all or most of the factors of production. Communism is the classic example of a planned economy. Communism is the classic example of a planned economy. © 2007 Pearson Custom Publishing Planned Economies

7 Market Economies In a market economy, competition within the marketplace is considered crucial to achieve efficiency in the allocation of resources (the factors of production). In a market economy, competition within the marketplace is considered crucial to achieve efficiency in the allocation of resources (the factors of production). Capitalism is the classic example of a market economy, also called “free enterprise,” “free market,” or a “private enterprise” system. Capitalism is the classic example of a market economy, also called “free enterprise,” “free market,” or a “private enterprise” system. © 2007 Pearson Custom Publishing

8 Profit Motive To understand the profit motive you need to understand the basics of Cost- Benefit Analysis. To understand the profit motive you need to understand the basics of Cost- Benefit Analysis. Virtually all activities or actions involve a “cost,” monetary or otherwise. Virtually all activities or actions involve a “cost,” monetary or otherwise. Most activities or actions have the potential for “benefit,” again not necessarily monetary. Most activities or actions have the potential for “benefit,” again not necessarily monetary.

9 © 2007 Pearson Custom Publishing Cost-Benefit Analysis Without extenuating circumstances, a person will generally do something only if the expected benefits are at least equal to the estimated costs or sacrifice. Without extenuating circumstances, a person will generally do something only if the expected benefits are at least equal to the estimated costs or sacrifice. If the benefits were equal to the cost, you would have a Break-even situation. If the benefits were equal to the cost, you would have a Break-even situation. When the benefits exceed the costs, you have a Profit. When the benefits exceed the costs, you have a Profit.

10 © 2007 Pearson Custom Publishing Definitions of “Profit” Terms “Profit” is the excess of benefit over cost. “Profit” is the excess of benefit over cost. “Gross Profit” is the difference between the cost to buy an item and the price charged when selling the item (i.e., “markup”). “Gross Profit” is the difference between the cost to buy an item and the price charged when selling the item (i.e., “markup”). “Net Profit” or “Net Income” is the final profit after subtracting all legitimate costs of doing business from the sales and other inflows into the business. “Net Profit” or “Net Income” is the final profit after subtracting all legitimate costs of doing business from the sales and other inflows into the business.

11 Learning Objective 3: Explain the basic issues in the debate over whether businesses have a social responsibility. © 2007 Pearson Custom Publishing

12 © 2007 Pearson Custom Publishing Social Responsibility of Business Many companies are displaying an increasing awareness of their responsibility with regard to social and environmental concerns. Many companies are displaying an increasing awareness of their responsibility with regard to social 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 are environmentally friendly. of the “green” companies, those that are environmentally friendly.

13 © 2007 Pearson Custom Publishing Stakeholders A stakeholder is anyone who is affected by the way that a company operates and the decisions that are made inside that company. A company owes a responsibility to the stakeholders. A stakeholder is anyone who is affected by the way that a company operates and the decisions that are made inside that company. A company owes a responsibility to the stakeholders.

14 Learning Objective 4: Distinguish among the three basic forms of business organization and describe the advantages and disadvantages of each. © 2007 Pearson Custom Publishing

15 © 2007 Pearson Custom Publishing Forms of Business Organizations Sole Proprietorships: An unincorporated business owned by a single individual. Sole Proprietorships: An unincorporated business owned by a single individual. Not necessarily a small business. The vast majority of U.S. businesses are sole proprietorships. Not necessarily a small business. The vast majority of U.S. businesses are sole proprietorships.

16 © 2007 Pearson Custom Publishing Proprietorship Advantages 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.

17 © 2007 Pearson Custom Publishing Proprietorship Disadvantages 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.

18 © 2007 Pearson Custom Publishing Forms of Business Organizations Partnerships: An unincorporated business with two or more owners. Partnerships: An unincorporated business with two or more owners. Most public accounting firms are partnerships. Many professional sports teams are partnerships, such as the Boston Celtics. Most public accounting firms are partnerships. Many professional sports teams are partnerships, such as the Boston Celtics.

19 © 2007 Pearson Custom Publishing Partnership Advantages 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.

20 © 2007 Pearson Custom Publishing Partnership Disadvantages Unlimited liability. Unlimited liability. Sharing of profits. Sharing of profits. Difficulty in dissolving. Difficulty in dissolving. Potential conflicts between partners. Potential conflicts between partners.

21 © 2007 Pearson Custom Publishing Separate Entity Assumption For proper accounting to occur, business events and transactions must be separated from the personal events and transactions of the owners. This is true for all forms of business organizations. For proper accounting to occur, business events and transactions must be separated from the personal events and transactions of the owners. This is true for all forms of business organizations.

22 © 2007 Pearson Custom Publishing Separate Entity Assumption Do not confuse a separate accounting entity with a separate legal entity. Only corporations are legally separate from their owners. Do not confuse a separate accounting entity with a separate legal entity. Only corporations are legally separate from their owners.

23 The Corporate Form A corporation is an “artificial being,” a legal entity separate and apart from the owners (stockholders). A corporation can sue, and be sued. A corporation can buy, own, and sell property. A corporation is an “artificial being,” a legal entity separate and apart from the owners (stockholders). A corporation can sue, and be sued. A corporation can buy, own, and sell property. © 2007 Pearson Custom Publishing

24 © 2007 Pearson Custom Publishing Corporation Advantages Limited liability. Limited liability. Greater access to capital. Greater access to capital. Easy transferability of ownership. Easy transferability of ownership. Continuity of life. Continuity of life. Greater management expertise. Greater management expertise.

25 Corporation Disadvantages Greater tax burden (double taxation). Greater tax burden (double taxation). Greater governmental regulation. Greater governmental regulation. Absentee ownership. Absentee ownership.

26 © 2007 Pearson Custom Publishing Other Business Forms Limited partnership: at least one general partner with unlimited liability. Limited partnership: at least one general partner with unlimited liability. Limited liability partnership (LLP): the liability of the general partner is limited. Limited liability partnership (LLP): the liability of the general partner is limited. Limited liability company (LLC): stockholders still enjoy the limited liability of a corporation, but they are taxed as if they are partners (no double taxation). Limited liability company (LLC): stockholders still enjoy the limited liability of a corporation, but they are taxed as if they are partners (no double taxation).

27 © 2007 Pearson Custom Publishing Discussion Question Imagine that you have the opportunity to start a company. Would you prefer to be an owner (or part owner) of a proprietorship, partnership, or corporation? Cite specific reasons for your choice. Imagine that you have the opportunity to start a company. Would you prefer to be an owner (or part owner) of a proprietorship, partnership, or corporation? Cite specific reasons for your choice. Follow-up: Want to learn more about starting a corporation? Try using the Internet site to see how easy it is to set up a corporation in that state. Follow-up: Want to learn more about starting a corporation? Try using the Internet site to see how easy it is to set up a corporation in that state.

28 Learning Objective 5: Distinguish among the three major types of business activities and define hybrid businesses. © 2007 Pearson Custom Publishing

29 © 2007 Pearson Custom Publishing Types of Businesses Manufacturing Companies Manufacturing Companies Merchandising Companies Merchandising Companies Wholesalers and Retailers Wholesalers and Retailers Service Companies Service Companies Hybrid Companies Hybrid Companies Some combination of the above Some combination of the above

30 Learning Objective 6: Explain the basic need for international business trade and the complications involved in this activity. © 2007 Pearson Custom Publishing

31 © 2007 Pearson Custom Publishing Global Nature of Business Many businesses operate within what is called the global economy. Many businesses operate within what is called the global economy. Imports, exports, and the “balance of trade” are all important factors in Imports, exports, and the “balance of trade” are all important factors in determining a nation’s determining a nation’s economic health. economic health.

32 © 2007 Pearson Custom Publishing Economic Complications Companies involved in international trade are often faced with many potential conflicts. Companies involved in international trade are often faced with many potential conflicts. Different currencies used around the world can cause problems in determining the “value” of a deal between two companies. Currency must be “translated” or converted. Different currencies used around the world can cause problems in determining the “value” of a deal between two companies. Currency must be “translated” or converted.

33 © 2007 Pearson Custom Publishing Political Complications Many countries impose quotas to limit imports. Many countries impose quotas to limit imports. Some countries impose tariffs on imports to raise tax revenue and also to increase prices of imported goods in relation to domestic goods. Some countries impose tariffs on imports to raise tax revenue and also to increase prices of imported goods in relation to domestic goods.

34 Learning Objective 7: Define accounting and distinguish among the different roles of accountants. © 2007 Pearson Custom Publishing

35 © 2007 Pearson Custom Publishing Accounting in the Business Environment The purpose of accounting is to provide useful information to decision makers. The purpose of accounting is to provide useful information to decision makers.

36 © 2007 Pearson Custom Publishing Definition of Accounting Accounting is a system for analyzing and recording business transaction, transforming the resultant data into information useful for decision making, and reporting to the proper stakeholders. Accounting is a system for analyzing and recording business transaction, transforming the resultant data into information useful for decision making, and reporting to the proper stakeholders.

37 © 2007 Pearson Custom Publishing Internal vs. External Decision Makers Internal: People within the organization who make decisions for the company with almost unlimited information. Internal: People within the organization who make decisions for the company with almost unlimited information. External: People outside the organization who make decisions about the company with limited information. External: People outside the organization who make decisions about the company with limited information.

38 © 2007 Pearson Custom Publishing Financial vs. Management Accounting Financial: Provides historical financial information to internal and external stakeholders. Financial: Provides historical financial information to internal and external stakeholders. Management: Provides detailed financial and non-financial information to internal decision makers. Management: Provides detailed financial and non-financial information to internal decision makers.

39 © 2007 Pearson Custom Publishing Accountant An information specialist who provides a variety of accounting and consultation services to businesses and individuals. An information specialist who provides a variety of accounting and consultation services to businesses and individuals.

40 © 2007 Pearson Custom Publishing Development of the Accounting Profession The stock market crash of 1929 created a need for investors and lenders to make prudent decisions about companies. The stock market crash of 1929 created a need for investors and lenders to make prudent decisions about companies. Congress enacted the Securities Act of 1933 and the Securities Exchange Act of 1934 creating the Securities and Exchange Commission (SEC). Congress enacted the Securities Act of 1933 and the Securities Exchange Act of 1934 creating the Securities and Exchange Commission (SEC).

41 © 2007 Pearson Custom Publishing The SEC Congress gave the SEC the authority to establish accounting principles. Congress gave the SEC the authority to establish accounting principles. The SEC delegated the authority to establish accounting principles to the accounting profession through the Financial Accounting Standards Board (FASB). The SEC delegated the authority to establish accounting principles to the accounting profession through the Financial Accounting Standards Board (FASB).

42 © 2007 Pearson Custom Publishing Standards for Financial Reporting Accounting is dynamic and changes with the natural evolution of business and technology. Accounting is dynamic and changes with the natural evolution of business and technology. FASB continues to focus on issues that affect financial reporting and the needs of financial report users, under the watchful eye of the SEC. FASB continues to focus on issues that affect financial reporting and the needs of financial report users, under the watchful eye of the SEC.

43 © 2007 Pearson Custom Publishing What is GAAP? Guidelines for presentation of financial accounting information designed to serve external decision makers’ need for consistent and comparable information are known as Generally Accepted Accounting Principles (GAAP). Guidelines for presentation of financial accounting information designed to serve external decision makers’ need for consistent and comparable information are known as Generally Accepted Accounting Principles (GAAP). Only pubic companies must conform to GAAP. Only pubic companies must conform to GAAP.

44 © 2007 Pearson Custom Publishing “Publicly traded” stock is listed on one of the national or regional stock exchanges. “Publicly traded” stock is listed on one of the national or regional stock exchanges. Most banks and other lenders or creditors also request that financial statements be prepared in accordance with GAAP. Most banks and other lenders or creditors also request that financial statements be prepared in accordance with GAAP. Who Is Bound by GAAP?

45 © 2007 Pearson Custom Publishing International Standards for Financial Reporting The International Accounting Standards Board (IASB) is responsible for development of international accounting standards. The International Accounting Standards Board (IASB) is responsible for development of international accounting standards. The IASB and the FASB work together to develop a unified global set of standards. The IASB and the FASB work together to develop a unified global set of standards.

46 © 2007 Pearson Custom Publishing Accounting is a Profession Accounting is a profession as evidenced by : Accounting is a profession as evidenced by : a strict code of ethics a strict code of ethics code of professional conduct code of professional conduct continuing professional education continuing professional education licensing by a governmental unit. licensing by a governmental unit.

47 © 2007 Pearson Custom Publishing Certified Public Accountant An individual who meets educational and professional criteria to be licensed by a state board of accountancy. An individual who meets educational and professional criteria to be licensed by a state board of accountancy.

48 © 2007 Pearson Custom Publishing Accountants’ Roles Assurance Services Assurance Services Taxation Taxation Consulting Services Consulting Services Management Accounting Management Accounting

49 © 2007 Pearson Custom Publishing Assurances Services Requires independence of the accountant in fact and appearance. Requires independence of the accountant in fact and appearance. Attestation: evaluation of one party’s assertion to a third party. Attestation: evaluation of one party’s assertion to a third party. Auditing: process of gathering objective evidence, evaluating the evidence against specific criteria, and reporting the results to users of information. Auditing: process of gathering objective evidence, evaluating the evidence against specific criteria, and reporting the results to users of information.

50 © 2007 Pearson Custom Publishing Financial Statement Audit An examination by an independent CPA of enough of a company’s records to determine whether the financial statements were prepared in accordance with GAAP and demonstrate a fair representation of the company’s financial condition. An examination by an independent CPA of enough of a company’s records to determine whether the financial statements were prepared in accordance with GAAP and demonstrate a fair representation of the company’s financial condition.

51 © 2007 Pearson Custom Publishing Taxation CPAs help individuals and businesses legally minimize tax assessments. CPAs help individuals and businesses legally minimize tax assessments. CPAs represent clients in matters before IRS and state and local taxing agents. CPAs represent clients in matters before IRS and state and local taxing agents.

52 © 2007 Pearson Custom Publishing Consulting Services CPA provides data, decision information, and other advice to help the client manage the business. CPA provides data, decision information, and other advice to help the client manage the business. Requires expertise in a number of business subjects. Requires expertise in a number of business subjects.

53 © 2007 Pearson Custom Publishing Management Accounting A chief financial officer (CFO) is the highest level of management accountant who directs the firm’s financial affairs. A chief financial officer (CFO) is the highest level of management accountant who directs the firm’s financial affairs. Cost accounting is a narrow application of management accounting to determine the cost of a manufactured product. Cost accounting is a narrow application of management accounting to determine the cost of a manufactured product.

54 © 2007 Pearson Custom Publishing Accountants’ Responsibilities Accountants with certifications must: Accountants with certifications must: Maintain expertise with continuing education. Maintain expertise with continuing education. Maintain high ethical standards. Maintain high ethical standards. Meet their legal responsibilities to their clients and third parties who rely on financial information associated with the CPA. Meet their legal responsibilities to their clients and third parties who rely on financial information associated with the CPA.

55 End of Chapter F1