Business owners can reinvest profits to expand operations. Financial statements like the income statement and cash flow statement track performance over time. The income statement shows revenues, expenses, taxes, depreciation, and net income. Cash flow adds back depreciation, which is the gradual reduction in value of assets. Profits can fund new equipment, technology, and dividends. Businesses can also grow through mergers, where companies in the same industry or different stages of production join together. Mergers allow firms to grow faster, become more efficient, acquire new products, eliminate rivals, or change their image. Nonprofit organizations work to benefit members rather than earn profits. They include community groups, cooperatives, labor unions, professional associations,

1. Chapter 3, part 2

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.

3. Income Statement Sales of goods and services $1,000 Less: 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 $120 Plus: Depreciation 100 Cash Flow $220 Generates Investment in new plant, equipment and technology Allows Stockholder Dividends

4. 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

5. 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.

7. Many are legally incorporated to take advantage of unlimited life and limited liability.

8. Similar to profit-seeking businesses, but do not issue stock, pay dividends, or pay income taxes.

11. Government owned corporations, such as USPS

12. State governments provide colleges and universities, retirement plans, state police

13. Local governments provide fire and police protection and schools.

14. Public Utilities are municipal or investor-owned companies that offer products such as water, sewerage, and electric service to the public.