Chap 2

• What are the three basic types of organizational forms for a firm?

  Sole proprietorship, partnership, corporation
• What is a sole proprietorship?

  A firm owned by an individual or family
• What does unlimited liability mean for a sole proprietor?

  The proprietor's personal assets can be seized
• What is a partnership?

  A firm with two or more owners called partners
• What does a partnership agreement typically stipulate?

  How decisions and profits are shared
• What type of liability do all partners in a partnership have?

  Unlimited liability
• What is a limited partner in a partnership?

  A partner with limited liability for debts
• What distinguishes a corporation from other forms of business organization?

  A corporation is a legal entity distinct from its owners
• What document sets down the rules governing a corporation?

  The charter of the corporation
• What rights do shareholders have in a corporation?

  Entitled to cash dividends and voting rights
• How are managers selected in a corporation?

  By the board of directors elected by shareholders
• What is one advantage of the corporate form of business organization?

  Ownership shares can be transferred easily
• What does limited liability mean for shareholders in a corporation?

  Creditors can only seize corporate assets
• What are public corporations?

  Corporations with broadly dispersed ownership
• What is the role of professional managers in a corporation?

  To manage the business on behalf of owners
• Why might owners delegate management responsibilities to others?

  Managers may have better skills and experience
• What is one reason owners want to diversify their risks?

  To reduce the impact of losses in one firm
• How can managers gather accurate information about a firm's operations?

  By analyzing production technology and costs
• What is the "learning curve" effect in management?

  Managers continue working during ownership changes
• What potential conflict arises from the separation of ownership and management?

  Managers may neglect obligations to shareholders
• How can conflicts of interest between owners and managers be resolved?

  Through performance-based compensation and oversight
• What is the primary commitment of managers in a corporation?

  To act in the best interests of shareholders
• What is the "right" rule for managers to follow?

  To maximize the wealth of current stockholders
• Why is profit maximization ambiguous?

  It depends on uncertain future revenues and expenses
• How does the shareholder-wealth-maximization rule differ from profit maximization?

  It avoids ambiguities related to profits
• What facilitates the efficient separation of ownership and management?

  A well-functioning stock market
• Where can one find the goals of a corporation’s top managers?

  In the annual report to shareholders
• What is the "paradox" of voting among shareholders?

  Individual votes have little impact on outcomes
• How does the threat of takeover align managers' incentives with shareholders' interests?

  It replaces mismanaged firms with competent managers
• What characterizes a mismanaged firm?

  Its management leads to significantly lower market value
• Who can be a takeover bidder?

  A supplier, customer, or competitor of the firm
• What can reduce the effectiveness of the takeover mechanism?

  Government policies under antitrust laws
• What is the role of a financial executive?

  Anyone with authority for financial functions
• What are the main functions of a financial executive?

  • Planning: financial and corporate planning, budgeting, sales forecasting
  • Provision of capital: establishing capital programs
  • Administration of funds: cash management, banking arrangements
  • Accounting and control: accounting policies, internal auditing
  • Protection of assets: insurance coverage, asset protection
  • Tax administration: tax policies, relations with taxing agencies
  • Investor relations: communication with investors and stockholders
  • Evaluation and consulting: advising corporate executives
  • Management information systems: electronic data processing
• Who typically leads a large corporation?

  The Chief Executive Officer (CEO)
• What is the responsibility of the Chief Financial Officer (CFO)?

  Overseeing financial planning, treasury, and control
• What does the treasurer manage in a corporation?

  Working capital management
• What does the controller oversee in a corporation?

  Accounting and auditing activities
• What is one responsibility of the controller?

  Preparation of financial statements for stakeholders