Introduction Marijuana has long been a controversial issue in th.docx

Introduction
Marijuana has long been a controversial issue in the United
States. Research has identified that marijuana has the purposes
of medical use, and in many states, medical marijuana is
promoted by the state government. The very first federal act
that is related to marijuana can be traced back to the Marijuana
Tax Act of 1937, and the act imposed an excise tax on the sale
and possession of marijuana. However, the legalization of
marijuana is never an easy act since it involves so many parties.
Literature has been developed for years to discuss the potential
problems that the legalization of marijuana might face. In many
ways, the legalization of marijuana in literature is mainly
focused on the possible social change and demographic groups
that be affected by further changes. Currently, literature reviews
associated with the legalization of marijuana are mainly
focusing on social, economic, cultural, as well as political
aspects, and are discussing influences to certain groups of the
society.
Existing literature usually considers specific demographic
groups of users such as youngsters and those who have
committed crimes. Current literature always talks about how the
legalization of marijuana would affect certain groups but lack of
evidence to support the effect on society as a whole. The
literature has not been fully established as a solution to the
legalization of marijuana since demographic groups in different
states have different experiences related to the use of marijuana.
Also, existing literature focuses on discussing whether
legalizing marijuana contributes to social stability and what
might go wrong if certain factors are not fully considered.
Reviewing existing literature allows the public to
understand the current phase of the legalization of marijuana. In
this paper, literature would be discussed to see what has been
covered and what has been not This would help assess the
problems that come with the legalization of marijuana, and find

out what happens to the society if the legalization of marijuana
is incompleted.
Small Business
Management, 18e
Longenecker/Petty/Palich/Hoy
© 2017 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license
distributed with a certain product or service or otherwise on a
password-protected website for classroom use.
Managing Risk in the Small
Business
Chapter 23
use as permitted in a license distributed with a certain product
or
service or otherwise on a password-protected website for
classroom use.
Learning Goals:

dimensions.
of pure risk.
process, and explain how risk management
can be used in small companies.
an insurance program.
insurance coverage.
or
classroom use.
What is Business Risk?

earnings potential of a firm.
or loss) associated with an investment
decision.
no loss can occur—there is no potential for gain (only
downside).
23–4
copied, scanned, or duplicated, in whole or in
part, except for use as permitted in a license distributed with a
certain product or service or otherwise on a
Basic Types of Pure Risk:

Property
such as buildings
vehicles
ost to replace or replicate property at today’s
prices
value of a property
23–5

Property (cont.)
ance term that refers to the depreciated
value of a property
through the acts of people
reduces its value to the property owner
23–6

Property (cont.)
operations due to a direct loss to property
23–7
Liability Risks: Statutory Liability
on Legislation
employee for an employment-related injury
or illness, regardless
of fault.
23–8

Business Activity-Related
Liability Risks
igations (risks)
that firms assume when entering into
contracts with other parties
to assume the financial consequences of
another party’s legal liabilities.
23–9

Liability Risks: Contractual
Liability
can take legal action against the wrongdoer for
monetary damages
to cause injury (damage)
damage
23–10© 2017 Cengage Learning. All Rights Reserved. May not
be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed
with a certain product or service or otherwise on a password-
protected website for classroom use.

Liability Risks: Contractual
Liability (cont.)
Prudent Person) Standard
reasonable or prudent person would do
under similar circumstances.
to make the claimant whole, by indemnifying
the claimant for any injuries or damage arising
from the negligent action
23–11
Torts: Types of Compensatory

Damages
economic loss, such as medical expense, loss
of income, or the cost of property
replacement/restoration
pain and suffering, mental anguish, and loss of
consortium
23–12
Torts: Types of Compensatory
Damages

gross negligence or a callous disregard for the
interests of others and to have a deterrent
effect
23–13
Product Liability
urs
during the manufacturing process causing the
product to subsequently not be made according
to specifications.

though the product was made according to
specifications.
23–14
Product Liability (cont.)
user that hazards are associated with a product
or to provide adequate instructions on safe
product use.
23–15

Sources of
Tort Liability
Automobile Liability
Product Liability
Completed
Operations Liability
Premises Liability
Operations Liability
Professional Liability
Employers’ Liability
Directors and
Officers Liability
or service or otherwise on a

Personnel Risks
s
but may have an indirect impact on a business
as well.
23–17
Risk Management
g with risk that are

designed to preserve assets and the earning
power of a firm.
reduce the cost of dealing with risk.
to minimizing the pure risks a firm is sure to
encounter.
23–18
1
Implement the decision.
Evaluate risks.
The Process of Risk Management
Identify and understand risks.

Select methods to manage risks.
2
3
4
Review and evaluate.5
use as
permitted in a license distributed with a certain product or
classroom use.
Risks on the Road to Success23.1
Risk Management in the Small
Business

Firms:
analyzing potential risk.
management to a specialized staff manager.
requires immediate attention—until
something happens.
23–21
Risk
Control
Loss

Prevention
Loss
Reduction
Loss
Avoidance
use as
classroom use.
Risk Transfer
Partially Self-
Funded Program
Risk Retention
Self-Insurance
Specific Stop
Loss Limit
Aggregate Stop
Loss Limit

Risk
Financing
use as
classroom use.
Basic Principles of a Sound Insurance Program
Evaluating an
Insurance Program
Identify business
risks that can be
insured
Relate premium costs
to probability of loss

Secure coverage for
all major potential
losses
Common Types of Business
Insurance
-peril approach
-risk approach
damages to property are covered except those
caused by perils specifically excluded.
value or a penalty will be applied to any covered
loss.
23–25

Coinsurance Example
If an insured building had a replacement value of $500,000, the
80
percent policy limit would require that the property be insured
for at
least $400,000 ($500,000 x 0.80). If the building was insured
for only
$300,000 and an insured loss of $100,000 occurred, the
recovery
would be limited to $75,000, calculated as follows:
Property and Casualty Insurance

(cont.)
for lost income plus continuing
expenses due to direct loss impacting
business revenues.
Coverage
which the business is liable.
23–27
Property and Casualty Insurance
(cont.)

a vehicle resulting from insured perils such as
collision, theft, vandalism, hail, and flood.
to employees for medical
expenses, loss of wages, and rehabilitation expenses,
as well as death benefits for employees’ families.
23–28
Property and Casualty Insurance (cont.)
usiness Owner’s Policy (BOP)
designed to meet the personal property and general

liability insurance needs of small business owners
to purchase all coverages separately
insurance
to actual cash value protection
23–29
Property and Casualty Insurance (cont.)
icy
for a BOP that combines property insurance and

commercial general liability insurance.
to purchase all coverages separately
23–30
Miscellaneous

Policies
Umbrella
liability
policies
Professional
liability
policies
Inland
marine
policies
Cyber
liability
policies
Life and Health Insurance
doctors’ offices, and rehabilitation facilities,

that usually includes outpatient services and
prescription drugs.
-care network that is less
expensive than that of a PPO but limits
employees’ choices of medical care providers
more than a PPO does.
23–32
Life and Health Insurance (cont.)
-care network that provides health
insurance that is generally more expensive
than an HMO but offers a broader choice of

medical providers
-Person Insurance
pon the death
of a firm’s key personnel.
23–33
Life and Health Insurance (cont.)
firm’s partner or other key employee.
-person disability insurance
23–34

Key Terms
actual cash value (ACV)
aggregate stop loss limit
all-risk approach
automobile insurance
business interruption insurance
business owner’s policy (BOP)
business risk
coinsurance clause
commercial general liability (CGL)
insurance
compensatory damages
crime insurance
design defect

direct loss
disability buyout insurance
disability insurance
economic damages
funds transfer fraud
health maintenance organization
(HMO)
indemnification clause
indirect loss
key-person life insurance
loss avoidance
loss prevention
loss reduction
manufacturing defect
market risk
use as
classroom use.

Key Terms
market risk
marketing defect
named-peril approach
noneconomic damages
package policy
partially self-funded program
peril
personal property
personnel risks
preferred provider organization
(PPO)
proximate cause
punitive damages
pure risk
real property
reasonable (prudent person) standard

replacement value of property
risk control
risk financing
risk management
risk retention
risk transfer
self-insurance
specific stop loss limit
torts
workers’ compensation insurance
workers’ compensation legislation
Key Terms
commercial general liability (CGL) insurance

automobile insurance
crime insurance
business owner’s policy (BOP)
package policy
health insurance
health maintenance organization (HMO)
preferred provider organization (PPO)
key-person insurance
disability insurance
Small Business
Management, 18e
Longenecker/Petty/Palich/Hoy

Managing the Firm’s Assets
Chapter 22
or
classroom use.
Learning Goals:
business.
cash flows.
in managing accounts
receivable.

inventory.
payable.
or
classroom use.
Learning Goals (cont.):
conversion period.
capital budgeting decisions.
firms.
or

classroom use.
The Working-Capital Cycle
-Capital Management
t
liabilities
receivable, and inventories) less current liabilities
(short-term notes, accounts payable, and
accruals)
22–5
The Working-Capital Cycle

(cont.)
-Capital Cycle
working-capital accounts
22–6
1
Collect the accounts receivable (decreases
accounts payable and increases cash).
Sell inventory for cash; sell inventory for
credit (accounts receivable).
The Working Capital Cycle
Purchase or produce inventory for sale,
which increases accounts payable.
Pay the accounts payable (decreases cash

and accounts payable).
2
3
4
Begin cycle again.5
use as
classroom use.
Working
Capital
Cycle
22.1

Working Capital Time Line
Day a. Inventory is ordered in anticipation of future sales.
Day b. Inventory is received.
Day c. Inventory is sold on credit.
Day d. Accounts payable come due and are paid.
Day e. Accounts receivable are collected.
22.2
Cash conversion period—
the time required to convert paid-
for inventories and accounts
receivable into cash.

Working Capital Time Lines for Pokey, Inc., and Quick Turn
Company22.3
Pokey, Inc.’s Beginning Balance
Sheet
July
Cash 400
Accounts receivable 0
Inventory 0
Fixed assets 600
Accumulated depreciation 0
TOTAL ASSETS 1,000
Accounts payable 0
Accrued operating expenses 0

Income tax payable 0
Long-term debt 300
Common debt 700
Retained earnings 0
TOTAL DEBT AND EQUITY 1,000
Pokey, Inc.’s Monthly Balance Sheets
July Aug. Sept.
Cash 400 400 (100)
Accounts receivable 0 0 0
Inventory 0 500 500
Fixed assets 600 600 600
Accumulated depreciation 0 0 0
TOTAL ASSETS 1,000 1,500 1,000

Accounts payable 0 500 0
Accrued operating expenses 0 0 0
Income tax payable 0 0 0
Long-term debt 300 300 300
Common debt 700 700 700
Retained earnings 0 0 0
TOTAL DEBT AND EQUITY 1,000 1,500 1,000
Changes: August
to September
–500
–500
July Aug. Sept. Oct.
Cash 400 400 (100) (100)

Accounts receivable 0 0 0 900
Inventory 0 500 500 0
Fixed assets 600 600 600 600
Accumulated depreciation 0 0 0 (50)
TOTAL ASSETS 1,000 1,500 1,000 1,350
Accounts payable 0 500 0 0
Accrued operating expenses 0 0 0 250
Income tax payable 0 0 0 25
Long-term debt 300 300 300 300
Common debt 700 700 700 700
Retained earnings 0 0 0 75
TOTAL DEBT AND EQUITY 1,000 1,500 1,000 1,350
Changes:
September
to October
+900
–500
–50

+250
+25
+75
Changes in Pokey’s Balance Sheet
Change in the Balance Sheet Effect on Income Statement
expenses of $250
expense of $50

Changes:
October to
November
+650
–900
–250
July Aug. Sept. Oct. Nov.
Cash 400 400 (100) (100) 550
Accounts receivable 0 0 0 900 0
Inventory 0 500 500 0 0
Fixed assets 600 600 600 600 600
Accumulated depreciation 0 0 0 (50) (50)
TOTAL ASSETS 1,000 1,500 1,000 1,350 1,100
Accounts payable 0 500 0 0 0

Accrued operating expenses 0 0 0 250 0
Income tax payable 0 0 0 25 25
Long-term debt 300 300 300 300 300
Common debt 700 700 700 700 700
Retained earnings 0 0 0 75 75
TOTAL DEBT AND EQUITY 1,000 1,500 1,000 1,350 1,100
Pokey’s November Income
Statement
Sales revenue 900
Cost of goods sold (500)
Gross profit 400
Operating expenses:
Cash (250)
Depreciation expense (50)

Total operating expenses (300)
Operating income 100
Income tax (25%) (25)
Net income 75
Managing Cash Flows
whether or not the firm can meet its current
obligations.
and outflows
22–17

Managing Cash Flows (cont.)
growth
22–18
Flow of Cash Through a Business22.4

Managing Accounts Receivable
decision to delay the inflow of cash from
customers who have been extended credit.
akes credit sale to customer.
22–20
(cont.)

◦ Average collection period—number of days, on
average, a firm is extending credit to its customers.
22–21
Days sales outstanding =
Accounts receivable
Annual credit sales ÷ 365
daysExample: Fast Co. Slow Co.
Total sales $1,000,000 $1,000,000
Credit sales 700,000 700,000
Average credit sales per day 1,918 1,918
Accounts receivable 48,000 63,300
Fast Co.’s
Days Sales
Outstanding
=

48,000
= 25 days
700,000 ÷
365
Slow Co.’s
Days Sales
Outstanding
=
63,300
= 33 days700,000 ÷
365
Managing Collections on
Accounts
le collections
one day per week.

work plan and payment schedule and have
it signed by the customer.
22–22
Credit Management Practices
sending notices on billings.
impediments to cash flows.
Age accounts receivable on a monthly or even a weekly
basis to identify delinquent accounts.
accounts.

—a post office box for receiving
remittances.
for use as permitted in a license
(cont.)
discount to another firm.
22–24

(cont.)
factored receivables
eral in borrowing
22–25

Managing Inventory
always match up.
te cash flow
problems.
—number of days, on average,
that a company is holding inventory.
for use as permitted in a license distributed
with a certain product or service or otherwise on a password-
protected website for classroom use.
Days in inventory =
Inventory
Cost of goods sold ÷ 365
days

Managing Inventory (cont.)
Controlling stockpiles
-hand inventory with demand.
-customer
relationship.
cost for excess inventory may exceed any savings.
22–27
Managing Accounts Payable
time.

-term cash
needs until payment is demanded.
payment should be examined for their savings
potential.
22–28
Managing Accounts Payable
(cont.)
—pay early enough to
get cash discounts and timely enough to avoid
late-payment fees.

22–29
An Accounts Payable Timetable for Terms of 3/10, Net 30
Annualized
interest rate
discount%Cash-100
%discount Cash
x
perioddiscount Cash-periodNet
yearinDays
=
3-100

3
X
10-30
365
=
56.4%or0.564,0.030928x18.25 ==
22.5
Capital Budgeting
lps managers make decisions about
long-term investments such as:
22–31

Capital Budgeting (cont.)
.)
the cost of making the investment?”
decisions can put the firm out of business.
22–32
Capital Budgeting Techniques

per dollar of average investment?
h flows (net present value or
internal rate of return)
the investment compare to the investment outlay?
22–33
Three Rules of Capital Budgeting
of an investment prefer:

1. More cash rather than less cash.
2. Cash sooner rather than later.
3. Less risk rather than more risk.
22–34
(cont.)
Investment
after-tax profits relative
to the average book
value of an investment.
22–35

Year After-Tax Profits
1 1,000
2 2,000
3 2,500
4 3,000
2
000010
4
0003500200020001
+
+++
=
,
,,,,
Accounting return

on investment
42.5%or0.425,
5,000
2,125
==
Initial investment = $10,000
(cont.)
◦ Measuring the amount of time it will take to
recover the cash outlay of an investment.
22–36
After-Tax
Year Profits
1–2 1,000

3–6 2,000
7–10 2,500
After-Tax
Cash Flows
2,500
3,500
4,000
Investment Recovery
Year 1-2 Year 3-5
5,000
10,500
Original Investment = $15,000
Acceptable payback period= 5 years
Payback period = 4.86 years
Annual Depreciation = $1,500
Discounted Cash Flows

flows with the cost of the initial investment.
received in the future—the time value of money.
V)
over time less the initial investment outlay.
22–37
Discounted Cash Flows (cont.)
xpects to earn on a
project; return rate must exceed cost of capital.

22–38
Capital Budgeting Analysis in
Small Firms
Analysis Process:
and liquidity problems
22–39

Key Terms
accounting return on
investment technique
capital budgeting analysis
cash conversion period
days in inventory
days in payables
days sales outstanding (average
collection period)
discounted cash flow (DCF)
techniques
internal rate of return (IRR)
lock box
net present value (NPV)
payback period technique

pledged accounts receivable
working capital cycle
working capital management
use as
classroom use.

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