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Questions and Answers
What type of firm offers protection to owners so they do not lose more than their investment?
What type of firm offers protection to owners so they do not lose more than their investment?
- Sole proprietorship
- Corporation (correct)
- Limited liability company
- Partnership
A partnership is owned by a single individual.
A partnership is owned by a single individual.
False (B)
What is the principal-agent problem?
What is the principal-agent problem?
A problem where an agent pursues his own interests rather than the interests of the principal.
A financial security that represents partial ownership of a firm is called a ______.
A financial security that represents partial ownership of a firm is called a ______.
Match the financial terms with their definitions:
Match the financial terms with their definitions:
Which of the following describes indirect finance?
Which of the following describes indirect finance?
Retained earnings are a method of raising funds for a corporation.
Retained earnings are a method of raising funds for a corporation.
What is an interest rate?
What is an interest rate?
Flashcards
Sole Proprietorship
Sole Proprietorship
A business owned and run by one person, with no legal separation between the owner and the business.
Partnership
Partnership
A business owned by two or more people who share profits and losses.
Corporation
Corporation
A legal entity separate from its owners, providing limited liability protection.
Bond
Bond
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Stock
Stock
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Dividends
Dividends
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Income Statement
Income Statement
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Liability
Liability
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Study Notes
Types of Firms
- Sole proprietorship: A business owned by one person, not a corporation
- Partnership: Owned by two or more people, not a corporation
- Corporation: A business that legally protects owners from losing more than their investment if the business fails
Assets and Liability
- Asset: Something of value owned by a person or a firm
- Limited liability: A legal protection that shields owners of a corporation, limiting losses to their investment
- Corporate governance: The way a corporation is structured, affecting its behavior
Separation of Ownership and Control
- Separation of ownership from control: In corporations, top management controls daily operations, rather than the shareholders
Principal-Agent Problem
- Principal-agent problem: Agents (managers) might prioritize their interests over the principal's (shareholders')
How Firms Raise Funds
- Indirect finance: Funds flow from savers to borrowers via financial intermediaries (e.g., banks)
- Direct finance: Funds flow directly from savers to firms through financial markets (e.g., stock exchange)
- Direct finance securities: Bonds and stocks
Financial Statements
- Liability: What a person or firm owes
- Income statement: Shows revenue, costs, and profit over a period
- Accounting profit: Revenue minus operating expenses and taxes
- Opportunity cost: The value of the next best alternative forgone
- Explicit cost: Costs involving spending money
- Implicit cost: Non-monetary opportunity costs
- Economic profit: Revenue minus all explicit and implicit costs
- Balance sheet: Financial position of a firm on a specific date (usually end of quarter/year)
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