Chapter 3, part 2Chapter 3, part 2

3-2: Business Growth and Expansion

1. Growth Through Reinvestment– Business owners can use their profits to

update and expand their firms.– Keep track of business operations with

financial statements.• Income statement – report showing sales,

expenses, net income, and cash flows over a given period.

• Net income – profits determined by subtracting all expenses from revenues.

• Depreciation – gradual wear on capital goods• Cash flow – total amount of new funds a

business generates from operations.

Income Statement

Sales of goods and services $1,000Less: Cost of goods sold 400

Wages and salaries 250 Interest payments 50 Depreciation

100

Earnings before taxes $200 Less: Taxes at 40% 80

Net Income $120Plus: Depreciation 100

Cash Flow $220

Allows

Stockholder Dividends

Investment in new plant,

equipment and technology

Generates

2. Growth Through Mergers– Two businesses decide to join together into

one business. – One of the businesses must give up its

separate legal identity, but the name of the new company will often reflect the identities of both.

– Horizontal Merger – Two firms that produce the same kind of product join forces.

– Vertical Merger – Companies involved in different stages of manufacturing or marketing join together.

– Reasons for merging:• Grow faster• Become more efficient• Acquire or deliver a better product• Eliminate a rival• Change image

– Conglomerates• Firm that has at least four businesses, each

making unrelated products, and none responsible for a majority of its sales.

– Multinationals• Corporation that has manufacturing or service

operations in a number of different countries.

3-3: Nonprofit OrganizationsOrganization that works in a business like way to promote the collective interests of its members rather than to seek financial gain for its owners.

1. Community Organizations- Schools, churches, hospitals, welfare groups,

adoption agencies, etc.- Many are legally incorporated to take advantage of

unlimited life and limited liability.- Similar to profit-seeking businesses, but do not

issue stock, pay dividends, or pay income taxes.- Revenues are reinvested to further their work.

2. Cooperatives- Voluntary association formed to carry on some

kind of economic activity that will benefit its members

3. Labor Unions- Organization of workers formed to represent its

members interests in various employment matters

4. Professional Associations- Consists of people in a specialized occupation interested in improving the working conditions, skill levels, and public perceptions of the profession

5. Business Associations- Businesses also organize to promote their collective interests

6. Government- Many government agencies produce and

distribute goods and services to consumers, giving government a direct role in the economy

- Government owned corporations, such as USPS- State governments provide colleges and

universities, retirement plans, state police- Local governments provide fire and police

protection and schools.- Public Utilities are municipal or investor-owned

companies that offer products such as water, sewerage, and electric service to the public.