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BA 101:Midterm #2
Financial Ratios
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Computed from an organizations balance sheet and income statement
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Ratio Analysis
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Expressing the relationships between any two accounting elements
-Great for financial analysis (Past Performance, Competitors performance, Industry Performance)
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What are the 4 key categories of ratios?
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1. liquidity
2. Leverage (debt)
3. Profitability
4. Activity
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Return on Sales
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ROS: Net Income/ Sales
-The measure of how much profit was created for every dollar of sales
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Asset Turnover
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Turnover= Sales/Total Assets
-Sales in a particular year/value of total assets in a particular year
-Measures the amount of "activity" taking place of how active the assets are in regards to sales
-Higher the assets = higher turnover
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Return on Assets
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ROA=Net-Income/Total Assets or ROS * Turnover
-How much profit created from assets
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Return on Equity
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ROE=Net -Income/ Owners Equity or ROS * turnover * Leverage= ROE
-How much profit created from owners investments
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Leverage
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Leverage=Total Assets/Total Owners Equity
-Measures how big of a company the managers have created using the owners investments
-Smaller leverage # indicates less dependency on debt to purchase assets so owners own a greater portion of assets
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What is the primary goal of a company?
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To make a profit for its shareholders
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Current Ratio
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Current Ratio=Current Assets/Current Liabilities
-A company's ability to meet short-term debt obligations
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Quick or Acid Ratio
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Quick or Acid Ratio=(Current Assets + Inventory)/ Current Liabilities
-A company's ability to meet short term debt obligations without including inventory
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Debt-to-Assets Ratio
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Debt-to-Assets Ratio=Total Debt/Total Asses
-The percentage of funds that represent debt provided by creditors
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Debt-to-Net Worth Ratio
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Debt-to-Net Worth Ratio=Total Debt/Tangible Net Worth
-What the business "owes" compared to what it is worth
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Times Interest Earned Ratio
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Times Interest Earned Ratio=EBIT/Total Interest Expense
-The extent to which earnings can decline before the company is unable to meet its annual interest costs.
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Average Inventory Turnover Ratio
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Average Inventory Turnover Ratio=Cost of Goods Sold/Average Inventory
-The number of times average inventory is sold out, or turned over, during the accounting period.
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Average Collection Period Ratio
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Average Collection Period Ratio=Credit Sales/Accounts Receivable
-The average number of days it takes to collect accounts receivables
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Average Payable Period Ratio
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Average Payable Period Ratio=Purchases/Accounts Payable
-The average number of days it takes to pay its accounts receivable
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Net Sales to Total Assets
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Net Sales to Total Assets=Net Sales/Total Assets
-A company's ability to generate sales in relation to assets
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Revenue
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Revenue=Price(per unit) * Units Sold
-Funds that come into the company from the sale of goods or services. These can be sales that are in cash or on-account
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Variable Cost
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Cost that are directly related to making the product.
-For Example Cost Per-Unit * Units
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Material Cost
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The cost of the materials (raw materials and component parts) that are used in the products you sold
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Labor Cost
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The cost of the labor (human resources) used to produce the products sold
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Inventory Carrying Cost
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The cost (warehouse, insurance, etc.) of having inventory available for sale but not yet sold
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Total Variable Costs or Cost of Goods Sold (COGS)
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This is the cost of making the products sold
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Contribution Margin
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Contribution Margin=Total Revenue - Variable Costs
-The difference between the revenue brought in by sales and the cost of making the products for sales. The difference is what is left over to operate your business and as profit.
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Period Cost or Fixed Costs
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Costs that are fixed over a period of time. They do not vary with level of activity
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Depreciation
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The amount of value that operating a business "uses up" in the plant (factory) and equiptmet
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Research and Development or R&D
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The investment the company makes in developing new products or improving existing ones.
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Marketing Expense
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The investment the company makes in advertising, selling, and distributing products
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Administrative Expense
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The cost of running a business; legal expenses, accounting services, etc.
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Total Period Costs
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The costs of operating your business over a period of time
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Earnings Before Interests and Taxes (EBIT), or Net Margin
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Revenues minus variable costs (contribution margin) minus period cost
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Interest Expenses
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The rent you pay to use other peoples wealth. This is the expense of your financing strategy
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Taxes
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The tribute you pay to the government as a citizen of a society
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Net Income
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Net Income=Revenues - Variable Costs - Period Costs - Interest expenses and taxes
-This is synonymous with profit, earnings. "return," and "bottom line."
-Creating net income for its owners is the reason a business exists.
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Gross Margin
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Gross Margin=Total Revenue - (Variable Costs + Depreciation)
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Complement
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The number of workers in the workforce. Needed Complement is the number of workers required to fill the production schedule without overtime
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Caliber
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The talent of the workforce. If companies are willing to spend the money, they
can recruit a higher caliber of worker. This results in higher productivity and lower
turnover.
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Training
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The amount of time workers spend in training each year. Training leads to
higher productivity and lower turnover, but takes people off the job while they are in the
classroom. Each training hour costs $20.00 per worker
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Needed Complement
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The number of workers needed this year if the company is to avoid overtime
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1st Shift Complement
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For each product, if your schedules are less than or equal to the 1st ShiftCapacity, your workers will only be used on a 1st Shift
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2nd Shift Complement
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If for any product your schedule is greater than your 1st Shift Capacity, and if the This Year (%) is at or near 100%, workers will be added to a 2nd Shift.2nd Shift workers are paid 50% more per hour than 1st Shift workers. 2nd Shift scheduling has no impact upon the Productivity Index.
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Overtime Percent
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The percentage of work performed on overtime. 100% means that every 1st
Shift worker is doing a double shift. 15% means that, on average, workers perform 15%
overtime. Overtime increases turnover and drags down productivity.
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Turnover Rate
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The percentage of workers who left the company last year, excludingdownsizing. Turnover is a function of employee dissatisfaction. The bestworkers leave first. Turnover is driven down by Recruiting Spend and Training Hours. Turnover also goes up as a result of overtime and a substandard compensation package from the Labor Negotiation. The Turnover Rate ignores downsizing factors
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New Employees
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Employees recruited this year. At a minimum, New Employees reflectsreplacement of workers lost during the course of the year to turnover. It also includes workers hired in January to increase the Complement from last year. New employees incur a Recruiting Cost. As a simplifying assumption, the simulation does not rehire fired or separated workers.
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Separated Employees
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Employees lost because of downsizing or increases in Automation.Specifically, Separated Employees is Last Year's Complement minus This Year's Complement. All separations occur in January and incur a Separation Cost.
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Recruiting Spend
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Recruiting Spend is the extra amount budgeted per worker to recruit highcaliber workers. The higher the budget, the better the worker, resulting in a higher Productivity Index and lower Turnover. Your entry is added to a base amount of $1,000 per new employee.
$0 means no extraordinary effort is spent recruiting new people. Diminishing returns apply after
$5,000 per worker.
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Training Hours
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Training Hours is the number of hours each year that each individual worker is taken off-line for training and development. For example, 40 means that each worker will spend 40 hours in training this year. Training produces a higher Productivity Index and a lower Turnover Rate. The more time off-line, the higher the needed Complement. Each training hour
costs $20.00 per worker in training costs.
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Productivity Index
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The Productivity Index indicates how the general workforce compares withthe workers employed in Round 0. 100% means that current workers are just as good as original workers. 110% means that, on average, you only need 91% (100 / 110 = 91) of the Complement to do the same work as a workforce comprised of original workers. Higher productivity means fewer workers are required, and that drives down per unit labor cost.
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Recruiting Cost
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The amount spent to recruit new workers. It equals the number of workersrecruited times ($1,000 + Recruiting Spend).
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Separation Cost
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The cost to separate (fire) workers. If you downsize your workforce (byreducing production schedules or increasing automation), each worker is given a separation package worth $5,000.
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Total Quality Management
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is the act of monitoring and improving the quality of products and services a company produces
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TQM’s primary objectives are to:
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•Educate and train managers and employees
•Encourage increased responsibility
•Search for production improvements
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Sales
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•Same as revenue
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EBIT
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Earnings Before Interest and Taxes
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Profits
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Net Income – or net loss
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Cumulative Profit
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All Net Income over time
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SG&A
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Selling, general & admin = period costs
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Contribution Margin
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(sales – variable costs [material and labor])
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Break Even
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•How much do you have to sell in order to break even (cover all costs)?
BE = Fixed Cost / (Price - Variable Cost per unit) aka contribution margin/unit
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Property Law
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Establishes the rights of a person to own, use, transfer, and captures the economic value of different kinds of property (tangible or intangible)
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Real Property(established from property law)
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Real estate and everything attached to it
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Personal Property(established from property law)
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Property and other real property
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Intellectual Property(established from property law)
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Property generated by a persons creative activities. Example: Patents
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Fair Competition
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Established in a wide variety of law and regulation.
-Restraining trade and monopolizing markets
-Price discrimination, tying, and exclusive agreements that substantially lessen competition
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Contract
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A contract is a mutual agreement between two or more parties whose terms are enforceable in court.
-Virtually every transaction is carried out by means of a contract.
-Does not have to be written
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Legal Purpose (Contract Element)
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The objective of the contract is described and it must be for a legal purpose
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Consideration (Contract Element)
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To be a contract, the agreement to exchange must involve something of economic value (money, goods, or services)
-Consideration is another term for money
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Voluntary Agreement
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The offer and acceptance of a contract
-Have to be freely and knowingly made
-minors, mentally unstable or incapable, insane, or intoxicated lack the capacity to enter into a legal contract.
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Breach of Contract
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Failure to live up to the terms agreed upon in a contract
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Statutory Law
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Written laws established by federal, state, county, or city governments
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Common Law
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Unwritten law that are established by judicial decisions; such law in the United States was inherited from English Law
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Administrative Law
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Regulations established by administrative agencies
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What are the two kinds of disputes?
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1. Disputes between an individual and the government (Criminal Law)
2. Disputes between two individuals (Civil Law)
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Trial Courts
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Determines the facts of a case, the laws that pertain, and apply the law to resolve the dispute
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Appellate Court
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If a party feels that the law was misinterpreted or misapplied, they can go to an appellate court.
-Decisions made in appellate court are binding and enforced through the power of the government
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Arbitration
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Resolution of disputes where parties submit their case to a neutral party called an arbitrator. The arbitrator decides how the dispute will be resolved.
-Binding or non-bindiing
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Mediaton
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Negotiation using a third party mediator to help reach an agreement.
-Non-binding
-Mediaitor like a counselor
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Agency
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Assign another person to the power to act and to enter into agreements
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Bankruptcy
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When and individual or business cant meet its contractual obligations and ask a court to declare bankruptcy to release them from contractual obligations
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Chapter 7 Bankruptcy
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Requires that the business be dissolved and assets liquidated
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Chapter 11 Bankruptcy
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Temporarily frees the business from its obligations white it reorganizes and works out a court-approved plan for meeting its obligations.
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Chapter 13 Bankruptcy
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Similar to Chapter 11, except it is limited to individuals versus business
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Uniform Commercial Code
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The laws governing business practice that are consistent amog states
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All sales are covered by a _
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Implied Warranty
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What does an express warranty cover?
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Covers any additional terms the seller will honor
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Tort
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A civil wrong
- When one party through action or inaction causes harm to others
-Sue onother person
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Fraud
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A form of Tort
-Criminal act in which one party in a transaction hurts another by purposefully deceiving or manipulating them.
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sole proprietorship
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-easy, quick, affordable
-full control
-risk and personal exposure
-credibility on the line
-raising capital
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partnerships in general
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-voluntary
-high liability
-mutual agency
-limited life
-limited acces to money
-control
-unregulated highly
-single taxation
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corporations in general
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-seperate legal entitiy
-limited liability
-limited stockholder power
-unlimited life
-easy capital
-stockholders may lose control
-government regulation
-double taxation
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general parnerships
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-mutual agency (all partners can make deals)
-high liability
-share risk/wealth equally
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limited partnership
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-no mutual agency
-no provsion for limited liability
-do not share risk/wealth equally
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domestic corp.
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operate in state which it is incorporated
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foreign corp
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operate in states other than their stat of incorporatioon
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alien corp.
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in one country but operate in another
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common stock
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-voting rights
-residual claims to assets
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preferred stock
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-no vote
-first claim on income-preferred dividend
-first claim on assets after debt
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s corp.
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limited liability, single taxation, unlimited life restrictions: number and type of shareholders
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limited liabilities
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like a corp, taxed like partnership, not limited to number of shareholders
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merger
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two into one
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acquisition
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one buys another
-horizontal- two in the same industry
-vertical- buy suppliers/distriubtors
-conglomerate- buy unrelated business
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