MULTIPLE CHOICE

Which strategy provides an example of a current marketing era, which focuses on exceeding
customer expectations?

A) At TextTalk International, a smartphone manufacturer, the production line is a 24-

hour operation, even if demand is low.
B) Your Choice Car Sales always maintains a large stock of pre-owned cars at great
prices. You can almost always get a car for about 30–40 percent cheaper than at another car sales
company, but you buy it "as is," without any warranties.
C) Easy Street Bookstore is known for stocking the top ten books on the monthly best
sellers list. These books are almost always available at a reasonable cost to the bookstore, and
they usually fly off the shelves. Easy Street Bookstore sees this as a win-win situation for
themselves and their customers.
D) RestWay Hotels is all about the experience. Their goal is to make certain that every
guest leaves their properties with a better feeling than when they first arrived. The CEO of
RestWay says, "We want you to think of our brand first when you make a hotel reservation."

Answer: D

Starting in the 1990s, managers extended the marketing concept by adopting the practice of
customer relationship management. CRM is the process of learning as much as possible about
present customers and doing everything you can over time to satisfy them—or even to exceed
their expectations—with goods and services.

Soleil, a marketing manager for a retailer of lighting products, will likely be involved in

A) setting a price for the light fixtures her firm produces.

B) deciding the best way to hire new employees to produce the lights.
C) developing ideas for new ways to produce the lights.
 D) determining the best way to finance the purchase of new production equipment.

Answer: A

Marketing managers deal with the four Ps: product development, pricing, place (distribution),
and promotion; thus Soleil will likely be involved in setting a price for the light fixtures her firm
produces.

Nate came up with an idea for a more durable soccer ball and developed a prototype. After
setting a price with a reasonable margin, he decided to take special orders and sell the balls
directly from his garage. He also promoted the ball with sales calls to professional soccer camps,
where players could try out his product. In marketing terms, we recognize that Nate has been
determining the factors in the

A) marketing concept.
B) marketing mix.
C) marketing equity.
D) marketing distribution.

Answer: B

The marketing mix is the part of the marketing process where marketers design the four Ps:
product, price, place, and promotion.

Mountain Stream Inc. designed a water filtration device that is drastically different and far
superior to any product currently on the market. Although consumer response was positive to the
idea of the new product, management wants to find out more before committing to full-scale
production. The next step Mountain Stream’s marketing department is likely to take is to
 A) locate a low-cost production site.
B) seek a joint venture with a larger competitor.
C) test market the product among potential users.
D) develop an advertising campaign to persuade consumers of the value of the new water
purifier system.

Answer: C

The process of testing products among potential users is called test marketing. This process can
provide a firm with valuable insights about how consumers will respond to a product before they
make a large commitment of money and resources to full-scale production.

Enrollment at Green View Community College has been in decline for five years. In the past the
college has relied strictly on enrollment from newly graduated high school students. In order to
identify other potential markets, the school would benefit from

A) test marketing.
B) sales promotions.
C) marketing research.
D) a stakeholder audit.

Answer: C

Marketing research is the analysis of markets to determine opportunities and challenges, and to
find the information needed to make good decisions such as how to reach other target markets.
Bubbles is preparing to open its newest children’s party site in Tallahassee. Once open, the
marketing department will be collecting information on what customers want while they are at an
event at the new location. The marketing research team for Bubbles and Baubles will create
original surveys with targeted questions to help collect reliable information. This type of research
is described by marketing professionals as the collection of

A) sequential data.
B) formative data.
C) primary data.
D) secondary data.

Answer: C

Primary data is the collection of original information, by creating research techniques unique to
this particular study. The creation of a survey is one type of primary data.

Roberto is a marketing manager for Inline Services. He has been looking at a variety of factors,
such as technological, sociocultural, and economic trends, as well as competitive conditions.
Roberto is confident that these factors will impact Inline’s future marketing success. His efforts
are an example of

A) target marketing.
B) competitive benchmarking.
C) relationship marketing.
D) environmental scanning.

Answer: D

Environmental scanning is the process of identifying factors that can affect marketing success.
These factors would include global, technological, social, competitive, and economic elements of
the firm's business environment.
Beyond the Backyard, a company that designs and manufactures athletic gear, focuses their
marketing efforts on people who participate in strenuous outdoor activities such as running,
hiking, and climbing. For example, the firm advertises heavily in Runner's World and Women's
Running. Beyond the Backyard is using __________ factors to segment its market.

A) demographic
B) value
C) volume
D) psychographic

Answer: D

Beyond the Backyard is basing its segmentation on the interests and lifestyle of its customers.
This approach is known as psychographic segmentation.

Get ‘n Go Grocery markets some of its products to consumers looking for simple, quick meals.
Get ‘n Go also offers another line of products targeted to people interested in low-fat, high-
nutrition foods. The company's strategy of dividing the market into groups that want similar
things from the products they buy is an example of

A) benefit segmentation.
B) demographic segmentation.
C) volume segmentation.
D) cultural segmentation.

Answer: A
Benefit segmentation emphasizes the benefits a product provides in order to appeal to
consumers interested in those types of benefits. Thus, people who are in a hurry or who do not
like to spend much time in the kitchen may be attracted to one of these lines, while other
consumers who are very health conscious may find the other line of foods appealing.

Shout Magazine focuses its marketing efforts on reaching teen-aged girls interested in fashion
and celebrity culture. The firm believes that they are positioned to profitably serve this group of
consumers. Shout utilizes the strategy of

A) narrowcasting.
B) target marketing.
C) primary marketing.
D) focus group selection.

Answer: B

A target market is a group of customers with similar characteristics (a market segment) that a
firm believes it can profitably serve.

What scenario best represents an example of demographic segmentation?

A) An outerwear clothing company divides its market into groups by region of the
country, designing different products for people in different parts of the country.
B) A bike manufacturer offers different types of bikes designed to appeal to different age
groups and income levels.
C) An entertainment company divides its market according to the attitudes and interests
of its customers, marketing some films to people who enjoy action movies and targeting other
movies to people who prefer romantic comedies.
D) A food company has designed a special line of easy-to-prepare microwavable meals
that are low fat and high in fiber to attract people interested in the health benefits of the foods
they eat.
Answer: B

Demographic segmentation divides a market according to factors such as age, income, or

education.

Full Design Car Group manufactures several models to satisfy the different tastes and lifestyles
of its customers. Customers who want traditional SUV luxury and leather interiors would prefer
the Platinum model. Silver customers might be described as sportier and typically women. Fans
of the Bronze model may include a group that is seldom over 30 years of age, typically male, and
have often served in the U.S. military. By recognizing differences in its customers and using
different characteristics to define its customers, Full Design Car Group is

A) segmenting the market.

B) practicing one-to-one marketing.
C) avoiding cognitive dissonance.
D) benchmarking.

Answer: B

Niche marketing is the marketing strategy of focusing on small but profitable market segments
and offering these groups custom-designed goods and services.

Pete and Hollis are forming a new athletic wear company and plan to market their products in the
United States. They have decided it will be best to create four different marketing campaigns
since each region of the country has unique climates that match up with their clothing. What type
of segmentation are they planning to use?
 A) volume
B) geographic
C) demographic
D) psychographic

Answer: B

Geographic segmentation is by region, for example, the West, South, Midwest, and Northeast
regions of the United States

Jorge, after years working with the consumer market, has just been transferred into a new job
dealing with buyers in the B2B market. What key difference will Jorge likely notice between
consumer markets and B2B markets?

A) Businesses focus on developing wants and needs in consumer markets, while firms
work to satisfy the existing needs of the B2B market.
B) Relationship marketing tends to be much more important in consumer markets than in
the business-to-business markets.
C) Buyers in the business-to-business markets tend to be more rational than buyers in
consumer markets.
D) Business-to-business markets make greater use of marketing intermediaries such as
wholesalers and retailers than do consumer markets.

Answer: C

B2B buyers base their buying decisions on specifications and carefully weigh a variety of factors
(such as price, quality, and service) before making a commitment to buy. Consumer markets
purchases are thought to be more emotional.
The Coca-Cola Company produces Diet Coke, Diet Coke with fruit flavors, and Coke Zero along
with a number of other flavors. These products are part of Coca-Cola's

A) product line.
B) product mix.
C) product position.
D) product collection.

Answer: A

Diet Coke, Diet Coke in fruit flavors, and Coke Zero are all part of Coke's product line. A
product line is a group of products that are physically similar or are intended for a similar
market.

Morrison Mountain Bikes sells high-quality bicycles and accessories. The store is known for a
pleasant environment, friendly salespeople, and an excellent service department. All of these
elements are part of the __________ offered by Morrison.

A) total product offer

B) product line
C) competitive environment
D) marginal utility package

Answer: A

A total product offer consists of everything that consumers evaluate when deciding whether to
buy something.
Dawson Inc. makes pasta, paper goods, and adhesives. These different types of products are
referred to as Dawson’s

A) product line.
B) product mix.
C) product differentiation.
D) product life cycle.

Answer: B

Product mix is the term used to describe the combination of product lines offered by a
manufacturer.

The Procter & Gamble Company is a major producer of laundry detergents. In fact, Procter &
Gamble produces Bold, Cheer, Dreft, Era, Gain, Ola, PMC, Tide and other detergents that all
claim a variety of benefits. These products are part of Procter & Gamble's __________ in
laundry detergents.

A) product mix
B) product concentration
C) product store
D) product line

Answer: D

A product line is a group of products that are physically similar or are intended for a similar
market.
Snappy Fun is a new brand of chewing gum. The company knows product location is very
important since consumers want to buy this type of product with a minimum of effort. Snappy
Fun represents a(n)

A) shopping good.
B) specialty good.
C) convenience good.
D) industrial good.

Answer: C

Convenience goods and services are purchased frequently with a minimum of effort. Location
becomes very important for the consumer of these items.

Bethany Bridal is a wedding wear clothing store in a large suburban shopping mall. The
managers of the store know that their customers usually compare shop, looking carefully at
quality and price before deciding to buy. With this information, Bethany Bridal carries quality
clothing, offers competitive pricing, and friendly, helpful service. The target customers
apparently view wedding attire as a(n)

A) specialty good.
B) convenience good.
C) shopping good.
D) unsought good.

Answer: C

Shopping goods and services are those products that the consumer buys only after comparing
value, quality, and price from a variety of sellers.
Mavis, a collector of fine art, particularly loves paintings. She has been looking for an original
Frida Kahlo painting for months and has said that she is willing to go to extraordinary efforts to
acquire this painting for her collection. Clearly this painting represents a(n) __________ good
for Mavis.

A) shopping
B) specialty
C) unsought
D) luxury

Answer: B

Specialty goods and services are unique products that have a special attraction to consumers
who are willing to go out of their way to obtain them.

Kim lives in Dallas where winters are normally fairly mild. Last January, during an unusually
cold spell, the water pipes in her house froze and burst. She looked online to find a plumber who
was able to come out and repair the pipes the same day. Prior to the frozen pipes, the plumber's
services represented a(n)

A) unsought service.
B) industrial service.
C) specialty service.
D) convenience service.

Answer: A
Unsought goods and services are items that consumers are unaware of, haven't necessarily
thought of buying, or find that they need to solve an unexpected problem.

Next Up Computer Company thinks it will make a splash with cartoon-themed laptop cover
designs scheduled for release next year. The computers do not have any other feature differences
from what Next Up currently offers. This effort is an example of using __________ to
differentiate a product as new.

A) packaging
B) brand awareness
C) logistics
D) brand extension

Answer: A

Packaging has many functions. New packaging can change the product in the minds of
consumers. It can even be perceived as new.

Textbook publishers use a packaging strategy known as __________. Often the publisher will
combine complementary products for a single price such as a new textbook and an access code
for online software that students can use to test themselves on new concepts and principles.

A) warranting
B) bartering
C) bundling
D) trademarking

Answer: C
Bundling is a packaging strategy whereby producers will combine products and/or services, for
a single price.

Designers readily understand the power of __________. Shortly after former first lady Michelle
Obama was seen in a short-sleeve dress by a famous American designer, the designer shared this
image on social media and sales of the dress skyrocketed.

A) brand equity
B) brand association
C) brand awareness
D) marketing parity

Answer: B

Brand association means linking the brand to a favorable image, like famous product users, a
popular celebrity, or a particular geographic area. Marketers know that the right association,
directed to the right target market, can elevate your brand in the minds of consumers.

Malcolm is approached by a street vendor selling Rolex watches at ridiculously low prices.
Malcolm, however, noticed the sign near the watches that said “Rowlex watches for sale” and
was suspicious that the watches were illegal __________ brands.

A) knockoff
B) private
C) generic
D) manufacturers’

Answer: A
Knockoff brands are illegal copies of national or international brand-name goods such as D&G
shirts or Rolex watches.

Green Giant Green Beans, Chevrolet Corvette, Coca-Cola, Dole Pineapple, and Peter Pan Peanut
Butter are all examples of

A) private brands.
B) wholesaler brands.
C) manufacturers' brands.
D) registered generic brands.

Answer: C

Manufacturer's brands are the brand names of national manufacturers and are generally well
known among the buying public.

Tri-State Grocery operates a large chain of stores across three midwestern states. While Tri-State
doesn't actually produce any breakfast cereal, it markets a line of cereal under its own brand
name that was produced by another company. These cereals represent a

A) manufacturers' brand.
B) generic brand.
C) knockoff brand.
D) dealer (private) brand.

Answer: D
Dealer brands are products that carry a distributor's or retailer's name rather than the name of
the actual manufacturer. (Dealer brands are also called private brands, distributor brands, or
house brands.)

Department store owner Dillon Foley decided to make a gutsy move with his high-end Panama
Shore stores. Rather than focus on the upscale, luxury market that the store attracted earlier in the
decade, he focused on bringing in clothing with more mass appeal. The stores succeeded in
turning around downward trending sales. In conjunction with your understanding of the product
life cycle, which statement summarizes the marketing strategy?

A) Panama Shore recognized that it was not competing well with its traditional higher
income market. It decided to change its product offering and price to appeal to a broader market
and increase sales and profits.
B) Panama Shore stores recognized several markets that it could reach with its upscale
clothing lines.
C) Panama Shore positioned itself against, rather than with, the competition. It decided to
adhere to its price leadership position.
D) Panama Shore knew that in order to re-invent itself, it was going to have to practice
the same marketing strategy followed by Walmart and other discount stores. It would make all
marketing decisions based on cost. The price on an item need only exceed what it cost to make
and ship it. Falling prices became the norm.

Answer: A

When sales and profits begin to peak and drop off, products and services may have reached
maturity, and it is time to reevaluate the 4 Ps and consider what differentiates the product to
attract different market segments.
Currently, which product would most likely be considered in the growth stage of the product life
cycle?

A) DVD players
B) Welch's grape jelly
C) VR games
D) Camel cigarettes

Answer: C

VR games are still enjoying rapidly rising sales and very high profit levels. All of the others have
passed the growth stage.

Sales levels of Up-Top Climbing Gear are rising rapidly, profits are very high, and a growing
number of competitors are taking aim at Up-Top’s market lead. Based on this information, Up-
Top Climbing Gear is in which stage of the product life cycle?

A) introduction
B) growth
C) maturity
D) decline

Answer: B

The growth stage of the product life cycle is characterized by rapidly rising sales and very high
profits. These characteristics encourage new competitors to enter the market.
Sure-Start Battery’s promotional efforts are intended to increase the public's awareness of its
new product's benefits and uses. This effort is consistent with the __________ stage of the
product life cycle model.

A) introduction
B) growth
C) maturity
D) decline

Answer: A

The introduction stage of the product life cycle is the commercialization of a new good or
service. Promotional efforts are intended to inform potential customers of the benefits of the new
product.

Crossroad Transport is the one of the largest trucking companies in the Midwest. When the firm
raised its prices by 11 percent, all of its competitors soon announced they too were raising their
prices by 11 percent. It appears this industry is influenced by a __________ strategy.

A) price skimming
B) price leadership
C) market pricing
D) price discrimination

Answer: B

Price leadership is an industry practice in which all the firms in a specific industry follow the
pricing leadership of one or more dominant firms.
Nathan asks you to calculate the break-even point for his firm. You respond that you will need
more information, which includes

A) the values for all assets and liabilities.

B) total fixed costs, selling price per unit, and variable costs per unit.
C) forecasted sales volume, operating expenses, and asset values.
D) sales revenue and total liabilities.

Answer: B

The break-even point is found by dividing total fixed costs by the difference between selling price
minus variable costs per unit.

Stewart Electronics is considering a strategy to charge a very high introductory price for their 4D
home video theater. After identifying that their rival firms did not carry this new product, they
chose this pricing strategy to achieve maximum profits. Stewart Electronics has chosen a
__________ strategy.

A) high-low pricing
B) penetration
C) bundling
D) skimming

Answer: D

A skimming price strategy is one where the product is priced high to make optimum profit while
there is little competition.
Ink-Full Writing Utensils utilizes a strategy of low-priced pens and markers to attract customers
and discourage competition. This represents a __________ strategy.

A) high-low
B) bundling
C) skimming
D) penetration

Answer: D

A penetration strategy is one in which a product is priced low in order to attract customers and
discourage competitors.

Leo noticed that the vending machine chip bag size had changed. Upon further investigation, he
saw that each bag contained 2 ounces less than the previous chip bags. But the price remained
the same! The pricing objective of the snack company is to

A) increase profits by reducing the amount provided in each bag.

B) build traffic at the vending machines by changing the size of the bag.
C) undercut the competition by changing the size of the bag.
D) increase market share by reducing the amount provided in each bag.

Answer: A

One long-run pricing objective of almost all firms is to optimize profit. One way companies have
tried to increase profit is by reducing the amount of product provided to customers. Target
costing means designing a product to satisfy customers and meet set profit margins.
What does a break-even point of 100 units mean to a firm?

A) The firm must sell 100 units to maximize its profits.

B) Fixed costs plus variable costs equals 100 units.
C) By producing 100 units, the firm can ensure that variable costs completely cancel its
fixed costs.
D) If the firm sells 100 units, its total revenues will equal its total costs.

Answer: D

The break-even point is the sales volume where revenues from sales equal all costs.

Roger entered into a contract with the federal government to design a computer simulation model
for training national guard units. The contract calls for the final price to be set at a fixed
percentage profit over and above the cost of production. This seems to represent a

A) cost-based pricing strategy.

B) supply and demand formula.
C) demand-based pricing strategy.
D) price leadership pricing strategy.

Answer: A

Cost-based pricing is based on production costs plus some margin of profit.

Melinda owns a company that markets high-quality coffee makers and lunchroom supplies to
businesses. She faces stiff competition from larger firms like Walmart. Which competitive
strategy would probably work best for Melinda?
 A) Keep costs as low as possible by offering a no-frills approach with little or no extra
services.
B) Develop a skimming pricing strategy.
C) Utilize a high-low approach to pricing with a higher break-even point.
D) Focus on nonprice competition by offering excellent service and work on building
good customer relationships.

Answer: D

It is usually difficult for small firms to compete against larger firms solely on the basis of price.
It is usually easy for larger firms to match price cuts, but much harder to match the image of a
friendly responsive company that knows its customers on an individual basis. Achieving this type
of relationship and providing superior service can allow small firms to charge high enough
prices to prosper.

Operating in the southwestern states, Cloud Glider Airlines hopes to avoid entering the price war
that currently is taking place between several airlines on the east coast. One strategy to avoid
severe price competition and attract customers to fly Cloud Glider is to

A) provide frequent travelers the added value of special fringe benefits.

B) cut costs and services in order to maintain profit margins.
C) reduce flights and in-flight services and lay off employees.
D) determine the break-even price and charge slightly more than that.

Answer: A

It is usually difficult for small firms to compete against larger firms solely on the basis of price.
Nonprice competition works much better.
Jennae, owner of a jewelry shop in a small shopping center, sells jewelry produced by a national
company. Jennae sells to final customers, so she is a

A) merchant wholesaler.
B) retailer.
C) rack jobber.
D) channel captain.

Answer: B

A retailer is an intermediary who sells to the final users of a product.

Zola is an online company that helps people with the complex task of planning a wedding.
Multiple vendors are recommended for things like flowers, caterers, wedding gowns, and more.
Through Zola, a couple can establish a website that acts as a registry. Once the couple is married,
the website directs them to another site having to do with beginning married life. What type of
utilities is this site providing to its users?

A) form and service

B) service and time
C) service and information
D) form and information

Answer: C

Zola offers primarily service to people who are planning a wedding. The site also provides
information.
Coleman’s Mattress Distributors does not manufacture mattresses itself, nor does it even store or
handle any mattresses. Instead, Coleman’s solicits orders for mattresses from other firms, then
purchases the required amount from suppliers and directs them to ship the mattresses to its
customers. What is Coleman’s?

A) drop shipper
B) rack jobber
C) cash-and-carry wholesaler
D) limited distribution broker

Answer: A

A drop shipper is a wholesaler that solicits orders from other firms and arranges for the goods
to be shipped from the producer to the buyer. Drop shippers take title to the goods they
distribute, but do not handle, store, or deliver these goods.

After developing a new running shoe, Geoff and Carli were fortunate to get the attention of a
large online retailer. The retailer was willing to fund the production of the running shoes abroad,
as long as the designers agreed to sell their shoes through its outlets. The retailer was asking
Geoff and Carli to agree to

A) intensive distribution.
B) exclusive distribution.
C) multilevel distribution.
D) selective distribution.

Answer: B

Exclusive distribution means the online retailer will be the only retailer to offer the product in a
specified geographic area.
Office World Inc. operates a chain of very large stores that offer an incredible selection of office
supplies at very competitive prices. When Office World opens its first store in a new region,
smaller office supply stores almost always experience a noticeable drop in sales. Office World
stores can be classified as

A) warehouse clubs.
B) department stores.
C) category killers.
D) full-service wholesalers.

Answer: C

A category killer store offers a huge selection of goods within a single product category (such as
books, office products, or sporting goods).

Vera is the publisher of Small Space Gardening, which is a publication targeted to avid
gardeners living in places that aren’t garden-friendly. Because it is a small, new publication,
some of the larger bookstores, convenience stores, and newsstands are not agreeing to distribute
the magazine. Vera is very concerned by this trend, because she believes that her publication,
like most magazines, needs __________ distribution in order to succeed.

A) selective
B) exclusive
C) intensive
D) exhaustive

Answer: C

Magazines are convenience goods. Producers of convenience goods use intensive distribution to
put them into as many retail outlets as possible.
Parker, an employee at a tractor assembly plant for a U.S. manufacturer, manages a group of
employees who measure the quality of parts that arrive on rail cars from Mexico and other
countries. As a receiver of tractor parts from other suppliers, Parker works in

A) a franchise system.
B) supply chain management.
C) a corporate distribution system.
D) direct mail operations.

Answer: B

Supply chain management is the process of managing the movement of raw materials, parts,
work in progress, finished goods, and related information through all organizations in the
supply chain.

Tremont Industries has discovered a defect in one of its products that may result in injury to
users. The company believes it must quickly develop and implement a recall program. It is likely
that Tremont soon will be placing a great deal of emphasis on

A) inbound logistics.
B) materials handling.
C) reverse logistics.
D) third-party logistics.

Answer: C

Reverse logistics involves bringing goods back to the manufacturer because of defects or for
recycling materials.
Charlotte, a marketing manager, is worried her firm is doing a poor job of managing the
movement of finished products to the final consumer. If she is right, the company should work to
improve its

A) outbound logistics.
B) administered support system.
C) materials handling.
D) coordination of its freight forwarders.

Answer: A

Outbound logistics manages the flow of finished products to business buyers or consumers

Figaro Manufacturing wants to ship a large quantity of its music industry goods across the
country. They have contacted On Its Way Shipping Inc., to find out what the shipment would
cost. On Its Way has shown Figaro how it can arrange to use a combination of barges, trains, and
trucks to complete the shipment at a low cost. On Its Way’s strategy is an example of

A) online shipping.
B) intermodal shipping.
C) franchise distribution.
D) multilevel distribution.

Answer: B

Intermodal shipping uses multiple modes of transportation to complete a single long-distance

movement of freight.
New Day Vitamin Company's __________ relies heavily on advertising, personal selling, and a
limited use of product sampling.

A) marketing mix
B) promotion mix
C) communication network
D) transfer marketing

Answer: B

A company's promotion mix is some combination of promotional tools such as advertising,

personal selling, word of mouth, sales promotion, sampling, public relations, and publicity.

Saws and More promotes its services through Northwest Woods Today, a trade magazine that
charges Saws and More and other companies $5,000 per page for __________ to help offset the
magazine's publishing costs.

A) publicity
B) advertising
C) public relations
D) trade shows

Answer: B

Advertising is a paid, nonpersonal communication made through various media by

organizations and individuals who are in some way identified in the advertising message.

Ark Electronics plans to pursue a global advertising strategy. This means that
 A) it must avoid advertising in foreign markets and rely instead on other elements of its
promotion mix, such as personal selling and public relations.
B) it will use television for promoting its products in every country.
C) it will develop a single promotional strategy that can be implemented worldwide.
D) it must charge the same price in every market.

Answer: C

Global advertising calls for the development of a single product and promotional strategy that
can be implemented worldwide.

At a recent soccer tournament, a local beer distributor gave free coolers to all adults with a paid
admission. What is this an example of?

A) market segmentation
B) sampling
C) publicity
D) sales promotion

Answer: D

Sales promotion is a promotional tool that stimulates consumer purchasing and dealer interest
by the use of specially designed incentives to promote a business or a product

Heads Up Cola advertises their soft drinks during television shows that their target market
typically watches. Heads Up believes the best way of reaching its customers is through a
__________ strategy.

A) push
B) pull
 C) product placement
D) word-of-mouth

Answer: B

The goal of this pull strategy is to stimulate consumers to request retailers to stock the soft drink.

Despite its name, Central Yogurt is located in a small shopping center far from customers.
However, the company enjoys outstanding business because satisfied customers share their
enjoyable experiences at Central Yogurt with their friends and relatives. Central Yogurt
apparently benefits from positive

A) trade advertising.
B) word of mouth.
C) sales promotion.
D) public relations.

Answer: B

Word-of-mouth promotion encourages people to tell other people about products they have
enjoyed. It can be very effective in generating referral business.

Kid-Time Movies markets its DVDs and Blu-rays online. Recently, Kid-Time adopted a new
program that offers their current customers free rentals if they encourage their friends to visit
Kid-Time’s website. What does this promotional program represent?

A) personal selling
B) viral marketing
C) public relations
 D) blogging

Answer: B

Viral marketing is the term now used to describe everything from paying people to say positive
things on the Internet to setting up multilevel selling schemes whereby consumers get
commissions for directing friends to specific websites.

The Wisconsin Department of Travel and Tourism promotes the state by sending travel agents
and tour bus companies information about the state's many attractions. The hope is that by
stimulating interest in tour and travel agents, they will in turn encourage their customers to visit
Wisconsin. This example represents a __________ promotional strategy.

A) push
B) pull
C) sampling
D) product placement

Answer: A

In a push promotional strategy, distributors are encouraged to sell the good or service to their
customers.

Javier works in his company’s accounting department where it is his job to record all
transactions into journals. After completing this task, the next step in the accounting process is to

A) prepare the firm's financial statements.

B) post the information to the ledger.
C) determine the tax liability of the firm.
D) balance the difference between assets and liabilities.
Answer: B

All journal entries are posted to the ledger on a regular basis. This is the third step in the
accounting cycle.

Joy Lee works in the accounting department of Campton Manufacturing. Today she will use the
firm's ledger to summarize information that was posted over the most recent time period. Her
goal is to determine if the accounts are balanced as required by the double-entry method of
bookkeeping. To be sure they are correct, Joy Lee will prepare a(n)

A) account analysis.
B) statement of cash flows.
C) balance sheet.
D) trial balance.

Answer: D

A trial balance is a summary of all the financial data in the ledger to make certain the figures
are correct and balanced.

Nellie sews custom tote bags and other novelty items which she sells at craft fairs. An accountant
would consider her sewing machine, fabric, and other supplies she uses for her craft as

A) assets.
B) liabilities.
C) owners' equity.
D) intangibles.
Answer: A

Assets refer to tangible or intangible resources the firm owns and uses in order to operate the
business.

Derek will graduate from State University this year. He has accumulated $29,000 in student
loans during his four years at college. An accountant would classify the loans as

A) assets.
B) liabilities.
C) owners' equity.
D) intangibles.

Answer: B

Liabilities represent debts or obligations of an individual or a firm.

When reviewing the balance sheet for a pet grooming business, Randy noted the following
information: Company assets totaling $3.5 million, and liabilities totaling $1.3 million. On paper,
the net worth (owners' equity) for this business equals

A) $2.2 million.
B) $4.8 million.
C) $3.5 million.
D) $0.2 million.

Answer: A
As noted in the fundamental accounting equation, Assets – Liabilities = Owners' equity. On the
balance sheet, owners' equity is the same as net worth.

Lazy Day Laundry Company recently issued a corporate bond on which it expects to pay interest
for the next twenty years. The company would record this as a __________ on its balance sheet.

A) long-term asset
B) retained earning
C) long-term liability
D) long-term expense

Answer: C

Long-term liabilities are obligations that come due in a time period greater than one year

At the time Rico’s Restaurant Supply prepared its financial statements, it had several customers
who bought goods over the past three months on its "90 days same as cash" credit plan. These
customers had not yet paid their bills, but they have good credit ratings and Rico’s is confident
that they will make their payments on time. The amount these credit customers owe would show
up as part of the

A) current assets listed on Rico’s balance sheet.

B) current liabilities listed on Rico’s balance sheet.
C) a deferred cash flow on Rico’s statement of cash flows.
D) unrealized revenue reported on Rico’s income statement.

Answer: A
A current asset is an asset that can or will be converted into cash in less than a year. Current
assets include cash, accounts receivable, and inventory. Because Rico’s expects payments on
these accounts receivable within 90 days, they are considered a current asset.

Brighton Consulting is a management-consulting firm that provides its expertise to businesses

that employ its services. Since it does not hold an inventory of goods or produce any goods itself

A) its revenue will equal its net income.

B) its gross profit could be identical to its net revenue.
C) it is unlikely to have any operating expenses.
D) its balance sheet will not record any current assets.

Answer: B

In a service firm, there may be no cost of goods sold. In this case, there is no difference between
net revenue and gross profit.

Fatima is concerned because during the past four months her company has had trouble paying its
bills on time. She knows if this continues, the firm will have difficulties in accomplishing its
goals. What is Fatima concerned with?

A) asset disbursement
B) cash flow
C) depreciation
D) inventory valuation

Answer: B
Cash flow is simply the difference between cash flowing in and the cash flowing out of a
business. If a firm is strapped for cash, it has difficulty purchasing and paying for needed
inventory, supplies, and labor that ultimately help increase revenues.

Play It Again sells a unique and vast assortment of sheet music. Its customers are high school
and college band directors and choir directors who require several copies of the same music,
including music written for a variety of instruments. To buy inventory for resale, the business
seeks out wholesalers with large inventories. Since cash flow is always an important concern, the
owner keeps a watchful eye on how quickly various genres of sheet music sell. To help him in
this assessment, which ratio would be an important part of this company's financial analysis?

A) asset turnover ratio

B) inventory turnover ratio
C) sales turnover ratio
D) cost of goods sold turnover ratio

Answer: B

The inventory turnover ratio measures the speed at which inventory moves through the firm and
is converted to sales.

Your firm is a supplier to a major chain of discount stores. You have heard rumors that this chain
of discount stores is struggling financially. Which financial ratios would indicate the discount
store's ability or inability to pay its short-term debts?

A) liquidity ratios
B) leverage ratios
C) activity ratios
D) profitability ratios
Answer: A

Liquidity ratios measure the company's ability to pay its short-term debts.

We would expect the inventory turnover ratio for a luxury auto dealer to be __________ than the
turnover for a convenience store.

A) higher
B) more meaningful
C) lower
D) less helpful

Answer: C

The inventory turnover ratio measures the speed of inventory moving through a firm and into
sales. Due to the nature of the products involved, a luxury auto dealer would more than likely
have a lower turnover.

Juanita started a cake decorating business last year. Unfortunately, it failed quickly. She is
convinced that she lacked the necessary funds to promote her business and get it off the ground.
What did Juanita experience?

A) inadequate financial control

B) undervalued inventory
C) undercapitalization
D) a cash flow issue

Answer: C
Undercapitalization occurs when a business has insufficient start-up funds.

Eduardo is the manager of Hometown Hardware. During the past six months, his cash
expenditures have exceeded his cash receipts. Hometown Hardware is suffering from a(n)
__________ problem.

A) accounting
B) undercapitalization
C) cash flow
D) exchange rate

Answer: C

Cash flow problems occur when a firm's outflows of cash exceed its inflows. Poor management
of cash flow is a common cause of business failure.

When Pet Medic, a mobile veterinary company, first started operations, it extended three months
of credit to customers. It soon began to experience a cash flow problem. A finance professional
was hired to

A) manage accounts receivable.

B) manage accounts payable.
C) develop tax strategies.
D) audit the company ledgers.

Answer: A

Particularly in small companies such as the example in this question, monitoring and collecting
payments owed by customers is an important effort that leads to better cash flow.
A finance manager has asked his assistant, Viktor, to prepare the __________ budget. Viktor
will gather as much information as possible by utilizing the firm's other budgets and any
documents that summarize proposed financial activities.

A) master
B) cash
C) capital
D) line item

Answer: A

The master budget (also known as the operating budget) summarizes and ties together all the
company's other budgets.

Majestic Theaters has plans to build a new $30 million movie theater and intends to finance this
project through the sale of additional shares of ownership in their firm. Selling new shares of
stock represents __________ financing.

A) retained
B) debt
C) initial offering
D) equity

Answer: D

Equity financing refers to funds raised from either selling shares of ownership or from retained
earnings.
The owners of Kurt’s Kayak Shop worry that cash flow this winter may be insufficient to meet
the current operating expenses. While they anticipate a surplus of cash inflow as warm weather
approaches, they need funds now to meet the company's immediate obligations. The owners can
best resolve cash flow concerns by obtaining __________ financing.

A) intermediate
B) contingency
C) short-term
D) long-term

Answer: C

Short-term financing is intended to meet the immediate funding needs of an organization. These
are funds that will be repaid within a year.

If an airport that previously relied on metal detectors decides to invest in full body screening
ports that scan the entire body to detect weapons or explosive devices that someone may want to
take on board a plane, these expensive devices represent __________ assets.

A) long-term
B) short-term
C) intangible
D) interest-bearing

Answer: A

Large capital expenditures such as represented by expensive machinery are long-term assets.
These are purchased by businesses with the understanding that they will be used in the
business's operation for several years.
Recently, an electronics manufacturer borrowed $600,000 from a bank to secure financing for a
planned expansion. The __________ loan agreement requires that the electronics manufacturer
provide the title to their factory as collateral.

A) recapitalization
B) secured
C) pledged
D) minority

Answer: B

A secured loan is a loan that's backed by something of value, such as property or collateral. If
the borrower fails to pay the loan, the lender may take possession of the collateral.

By purchasing stock in Care Pharmaceuticals, Madison has become a(n) __________ the
company.

A) creditor of
B) owner of
C) general partner in
D) venture capitalist in

Answer: B

Selling stock in an organization is actually selling ownership in a firm

After earning $50 million in net income, Monroe Millwork distributed $15 million in dividends
to its stockholders. Monroe’s board of directors decided to invest the remaining $35 million back
into the business. This $35 million reinvestment of profits represents

A) a trust fund.
B) retained earnings.
C) preferred capital.
D) mutual funds.

Answer: B

Retained earnings are the profits the company keeps and reinvests in the firm.

Tangy Taco Restaurants announced it plans to issue $300 million in debenture bonds to fund the
expansion of its fast-food chain of restaurants. In financial terms, this means the corporation will

A) borrow $300 million worth of long-term financing; the bond issue will not carry any
collateral.
B) issue $300 million worth of equity financing; the bond issue will be backed by the
property and buildings purchased with the funds.
C) borrow $300 million worth of long-term financing; the issue will be backed by the
property and buildings purchased with the funds.
D) issue $300 million worth of interest-free bonds; financiers will be paid from the
revenues created by the individual franchises.

Answer: A

Debenture bonds are unsecured bonds that are not supported by collateral. The company is
engaging in debt financing through the issuance of long-term bonds.
Gro-More Industries invented a drought resistant grass seed that only needs watering three times
each year. In order to expand distribution worldwide, the company whose product produces lush
green foliage needs a large amount of funding—fast! The handful of seed scientists that own the
company decide to offer shares of stock to general investors. This first-time offering is a(n)

A) Stock Equity Commission (SEC).

B) Stock Fund Offering (SFO).
C) Broad-Based Offering (BBO).
D) Initial Public Offering (IPO).

Answer: D

The first time a company offers to sell its stock to the general public, the event is called an initial
public offering.

Leeland Metalworks, known for its very generous dividend policy, easily attracts investors.
These dividend payments basically represent

A) a part of the firm's profit distributed to stockholders.

B) the increase in market share the company has earned.
C) current value of the firm's stock holdings.
D) income that is sheltered from taxes.

Answer: A

A dividend is a part of the firm's profits that is distributed to shareholders.

Namrata owns 20 percent of the common stock of the Columbia Coffee Company. The company
announced plans to offer an additional 10,000 shares of common stock for sale. If Namrata
exercises her preemptive rights, Columbia Coffee must offer her the opportunity to purchase

A) 8,000 shares.
B) 2,000 shares.
C) as many of the new shares as the investor is willing and able to buy.
D) 20 percent of the outstanding preferred stock.

Answer: B

Preemptive rights give existing stockholders the opportunity to maintain their proportional
share of ownership in the company. If the investor currently owns 20 percent, she must be
offered the opportunity to buy 20 percent of the new issue (10,000 shares x 20 percent = 2,000
shares).

Trusted Toys hopes to raise long-term capital by promising in writing to repay the principal
provided by potential creditors in ten years. Additionally, the certificate issued by Trusted Toys
promises to pay 5 percent interest annually for the ten-year life of the security. Trusted Toys
intends to issue

A) stocks.
B) bonds.
C) mutual funds.
D) commodities.

Answer: B

A bond is a contract of indebtedness issued by an organization that promises payment of a

principal amount at a specified future time plus interest
Having just returned from serving with the U.S. Marines in Afghanistan, Nestor has managed to
save most of his earnings. He has enrolled in the local community college and he is back living
with his parents while he assimilates back into U.S. life. As his business major friend, he has
come to you for advice. He would like to see his $40,000 savings grow, yet he knows that he will
need it in about five years when he and his girlfriend are out of school and make plans to get
married. He also worries that his car may break down and he will need to invest in another used
car. What would you suggest for Nestor?

A) In order for Nestor to see growth, he will need to place the entire $40,000 in one stock
offering. You suggest a biotech stock that promises growth.
B) Nestor is still young. He needs to consider high-growth, higher-risk stocks and
corporate bonds. He is young enough to recoup his investment if it should experience a loss.
C) Nestor should determine what types of companies he is passionate about. He should
lead with his heart but should be warned that some of those companies will produce better yields
than others.
D) Since liquidity is a concern, Nestor would do best to diversify into four to eight
different investments, and keep a reasonable amount in cash (a savings account) for emergencies.

Answer: D

Diversification spreads out the risk. Nestor will decrease the chance (risk) of losing everything
on one investment.

A company announced a 2-for-1 common stock split for investors on record. This means that

A) the company’s stock price will increase to reflect the value of two shares for every one
share.
B) each share will be worth ½ of its previous value, but shareholders' total value of the
company will remain the same.
C) The value of the company’s common stock will remain the same, for a short period of
time, and then experience a guaranteed growth spurt.
D) The shareholders will sell their shares immediately after the split and take their capital
gains, as well as provide others an opportunity to invest in the company.

Answer: B

A two-for-one stock split would cause stock prices to drop by 50 percent. While there is no
change in each investor's total value in that issue after the stock split, they generally approve of
stock splits because often the demand for a share of stock at the lower price will be greater than
the demand at the higher price.
 Long-Answer Questions

Describe the steps involved in the marketing process.

Why is market segmentation important? Describe three ways firms can segment consumer
markets.

Identify and discuss the four eras of the evolution of marketing.

From a marketing management perspective, what is the meaning of a total product offer? What
are the important elements in the total product offer of your college or university?

Consumer goods and services are generally classified into four specific categories. What are the
four categories, and how do they differ? Illustrate by giving examples of products that are often
included in each category.

Discuss the role of packaging in a firm's total product offer.

What is a brand? What is a brand name? What is meant by brand equity?

Retail distribution strategies can take three different forms. Identify the three forms and give
examples of products that would be marketed using each strategy.
Explain how publicity differs from advertising. What are the advantages and disadvantages of
publicity in a firm's promotion strategy?

Explain the meaning of the fundamental accounting equation and its relation to the balance sheet.
If it is helpful, create an example using numbers.

Identify and describe three types of short-term financing.

What is equity financing? Identify and describe the major sources of equity financing.

What are two major forms of debt financing? Describe and differentiate between the two types.

Bonds represent a major source of long-term financing. What is a bond? Explain the major
elements that must be in a bond issue.

Explain the differences between preferred stock and common stock.

Describe four different types of common stock that an investor may consider, depending upon
the investor's strategy and risk tolerance.
Answer Key LAQs

Marketing is the activity, set of institutions, and processes for creating, communicating,
delivering, and exchanging offerings that have value for customers, clients, partners, and society
at-large. The first step in the marketing process is to identify a market opportunity. This may
involve marketing research.
Using the information gleaned from marketing research, the next step is to identify a target
market and design a product to satisfy a want or need. This may include anything that would
enhance the product in the eye of consumers, such as the brand. This process often includes
concept testing, in which marketers develop a detailed and accurate description of a product and
ask people for their reaction. Marketers may also use test marketing. Assuming these activities
result in positive customer reaction, the firm then is likely to commit to the product, though the
actual production may be outsourced to another firm. The design and development of the product
also involves coming up with an appropriate brand name that differentiates the firm's goods from
those offered by competitors.
The next step in the marketing process is setting an appropriate price. The pricing decision must
look at a number of factors, such as the prices of competing products and costs of production,
distribution, and promotion.
Another decision that must be made concerns how the product will be distributed. This involves
decisions about the use of middlemen such as retailers and wholesalers.
The marketing process also involves developing an appropriate promotion strategy. Promotion
consists of all of the techniques sellers use to motivate people to buy their products and services.
It includes advertising, personal selling, public relations, publicity, and various forms of
promotion such as coupons, contests, and rebates.
The last step in the marketing process is to build a relationship with the buyers. This includes
accepting advice and suggestions from customers and providing a way of resolving any
unsatisfactory outcomes so that the customer is pleased.
The overall market for most products consists of such a diverse set of customers that a single
business could not serve the entire market effectively. Thus, firms usually try to segment the
market into groups that have similar characteristics. They then target the markets they believe
they can profitably serve.
There are several ways to segment markets. Among the most common approaches are:
Geographic segmentation divides the market according to geographic regions.
Demographic segmentation groups customers according to factors such as age, income, or
education.
Psychographic segmentation divides the market into groups with different lifestyles, attitudes,
values, and interest.
Benefit segmentation identifies groups that seek different types of benefits from a product, such
as comfort, convenience, or health and fitness.
Volume segmentation separates the market according to volume of product use.
The evolution of marketing involved four eras: (1) production, (2) selling, (3) marketing concept,
and (4) customer relationship.
The generally philosophy of the production era was "Produce as much as you can because there
is a limitless market." From the time of the early settler to the early 1900s the production
capacity fell short of consumer demand. The greatest marketing need was for distribution and
storage.
As a result of mass production techniques, business production capacity exceeded the immediate
market demand by the 1920s. During the selling era, marketing efforts focused on persuading
consumers to buy existing products with little concern for service after the sale.
The boom in consumer spending and intensified competition following World War II marked the
start of the marketing concept era. Businesses recognized the need to be responsive to
consumers' wants and needs in order to generate profits. The marketing concept had three parts:
(1) a customer orientation, (2) a service orientation, and (3) a profit orientation.
The final and present stage of the evolution of marketing is the customer relationship era. The
concept of customer relationship management involves knowing as much as you can about
customers so that you can exceed their expectations with goods and services. Enhanced customer
satisfaction will yield long-term profits and customer loyalty.
*Students may reference the emerging era of mobile/on-demand marketing. This is not included
in the four eras of marketing at this time.
A total product offer consists of everything that consumers evaluate when deciding whether to
buy something.
Elements in a total product offer can include: price, brand name, convenience, package, service,
store surroundings, Internet access, buyers' past experience, image created by advertising,
guarantee, speed of delivery, and producers' reputation.

Students will generally identify several important elements in their college's or university's total
product offer. Among them may be:
● The tuition charged by the institution.
● The academic reputation of the institution.
● The "name" of the college, perhaps influenced by the success of the athletic department.
● The service the college offers in terms of degree programs, college placement, etc.
● The past experience of friends or relatives.
● The probabilities (guarantees) of getting a job after graduation.
● The surroundings or support facilities of the institution.
Consumer goods and services are classified in one of the following four groups: convenience,
shopping, specialty, and unsought goods and services.
Convenience Goods and Services: Products consumers wish to purchase frequently with a
minimum amount of effort. Location is very important for marketers as are image and brand
awareness. Examples of convenience goods and services include newspapers, candy, snacks, and
banking.
Shopping Goods and Services: Products that consumers buy only after comparing value, quality,
and price. They are products typically sold through shopping centers where consumers can make
comparisons. Examples of shopping goods and services include personal computers, appliances,
auto repair shops, and clothing.
Specialty Goods and Services: Products that have a special attraction to consumers in that
segment, so that they will go out of their way to obtain these goods. Specialty goods include
certain types of medical services, expensive furs, luxury automobiles, fine jewelry, and gourmet
food items.
Unsought Goods and Services: Products that consumers are unaware of, haven't necessarily
thought of buying, or find that they need to solve an unexpected problem. Emergency medical
treatments, the services of a plumber when pipes burst or an electrician when wires short out, or
towing services after a car breaks down are all examples of unsought goods.
The text points out that not all consumers classify goods in the same way. What is a convenience
good to one consumer might be a shopping good to another. Thus, when evaluating student
answers to this question, some flexibility in assessing examples is a good idea.
Packaging performs several important functions in the marketing process. In many cases an
innovative package design has literally made the product more useful and opened up large new
markets for the good. Packaging can also make the product more attractive to retailers by making
it easier to store and display, or easier to track inventory.
Packaging performs several important functions as required by the Fair Packaging and Labeling
Act. It protects the contents during shipping, handling, and storage. It also attracts consumer
attention, describes the contents inside and gives information about the contents, provides details
about product benefits, and may also describe the warranty, provide directions for use, and
indicate price, value, and usage.
The role of packaging in attracting attention and providing information to customers has been
growing in importance as goods that were once sold by salespersons are now being sold more
often in self-service outlets.
A brand is a name, symbol, or design (or combination of these) that identifies the goods and
services of one seller or group of sellers and distinguishes them from the goods and services of
competitors. A brand name is that part of the brand consisting of a word, letter, or group of
words or letters that differentiates a seller's goods from those of competitors.
Brand equity is a combination of factors, such as consumer awareness, loyalty, perceived quality,
images, and emotions that people associate with a particular brand name. At the heart of brand
equity is brand loyalty. This refers to the degree to which consumers are satisfied, like the brand,
and are committed to further purchases.
The three categories of retail distribution strategies are intensive, selective, and exclusive.
Intensive distribution puts products into as many retail outlets as possible, including vending
machines. Candy, gum, soft drinks, magazines, and other convenience goods are products that
utilize intensive distribution.
Selective distribution is the use of only a preferred group of the available retailers in an area.
Producers use this selection process to ensure quality sales and service. Producers of high-def
televisions, furniture, clothing, and appliances often use selective distribution.
Exclusive distribution is the use of only one retail outlet in a given geographic area. Producers
who use this type of distribution believe that a retailer that has exclusive rights to carry a product
has a greater incentive to stock more inventory, offer better service, and pay more attention to
their brand. Manufacturers of luxury cars and producers of other expensive specialty goods often
use exclusive distribution.
Publicity is any information about an individual, a product, or an organization that is distributed
to the public through the media, and that is not paid for or controlled by the seller. Advertising is
paid, nonpersonal communication through various media by organizations and individuals who
are in some way identified in the message. It can be repeated as often as needed.
A major value students should identify is that publicity is provided free in various media if a
story is interesting or newsworthy. Another advantage is that publicity can reach people who
would not read an advertisement. Publicity often gets very good placement in various media.
Perhaps the major advantage of publicity is its believability. If a story is carried by a newspaper
or in some other medium, the receiver often treats the information as news. News is considered
more believable than advertising.
Of course, publicity also has some disadvantages. There is no guarantee that the media will use
news releases or other information a firm provides in its attempts to generate publicity. Also, the
media may omit some of the message or modify the message in a way that makes it less positive.
Finally, once media have run a story, they are unlikely to repeat it.
Sales promotion is the promotional tool that stimulates consumer purchasing and dealer interest
by means of short-term activities. The idea is to create enthusiasm for the overall promotion
program.
Sales promotion can include a variety of techniques, so student answers may vary as to specifics.
However, since many customers are reluctant to buy a product that they have not tried, a
technique that is likely to be important for the new snack food is the use of samples. Another
technique that might be very useful is to set up special in-store displays to attract attention. Other
typical promotional techniques include coupons and contests. Finally, many firms are using
event marketing, which means they sponsor sporting, cultural, or entertainment events to build
goodwill and to draw attention to the product.
Sales promotion is not just directed toward consumers. It also can be used to build interest and
enthusiasm among the firm's own salespeople and distributors of the firm's products. Thus, sales
promotions can also include videos for the company's salespeople, or participation in trade
shows.
The fundamental accounting equation is a mathematical formula that equates a firm's assets with
its liabilities and owners' equity. Mathematically, it is written:
Assets = Liabilities + Owners' equity.
If we manipulate this equation by subtracting the liabilities from both sides of the equation, we
arrive at:
Assets – Liabilities = Liabilities – Liabilities + Owners' Equity
The liabilities on the right side of the equation cancel, and we arrive at:
Assets – Liabilities = Owners' Equity
Assets = What the business owns; Liabilities = What the business owes (its debts); Owners'
Equity = The business's net worth. As a mathematical sentence, the equation states:
[What the business owns] – [What the business owes] = [The business's net worth]
The balance sheet is set up like the fundamental accounting equation. The three main parts of the
balance sheet are the same as the three main terms of the fundamental accounting equation:
Assets, liabilities, and owners' equity.
Students may mention that short-term financing is the key job of the finance manager. They can
select from a wide range of options in answering this question. The following are specific types
of short-term financing:
Trade credit is the most widely used source of short-term financing. This refers to buying goods
today and being able to pay for them later. Discounts are often available with the use of trade
credit to encourage firms to pay quickly.

Promissory notes are often required from customers as a condition of obtaining credit. A
promissory note is a written contract with a promise to pay. Promissory notes can be sold by the
supplier to a bank at a discount (the amount of the note less a fee for the bank's service).

Family and friends are another source of short-term financing, though the text mentions that the
National Federation of Independent Businesses has found that entrepreneurs have come to rely
less and less on this source over the years. It's important to remember to treat this source of
funding just as you would treat financing from any other source.

Commercial banks are also a source of short-term financing, as are commercial finance
companies. Businesses are well advised to keep in contact with banks and build a relationship
that ensures financing when needed. Banks tend to be conservative and are often reluctant to lend
money to new or risky ventures. Finance companies are willing to accept higher levels of risk
than commercial banks, but they also charge higher interest rates. Finance companies typically
require borrowers to offer tangible assets as collateral. Banks may also demand some form of
collateral, though in some cases they offer unsecured loans. (The stronger the firm, the more
likely the firm will be able to obtain an unsecured loan.) Other financing options available from
commercial banks include:
• inventory financing: financing that uses inventory such as raw materials as collateral.
• line of credit: an arrangement in which the bank will lend a given amount so long as the funds
are available.
Factoring involves the process of selling accounts receivable for cash. The factor buys the
accounts receivables at a discount. The discount rate depends on the age of the accounts, the
nature of the business, and the condition of the economy. Also, the discount will be less if the
firm selling the receivables is willing to assume the risk for nonpaying customers.
Commercial paper consists of unsecured promissory notes, in amounts of $100,000 or more
that mature in 270 days or less. The notes state a specific amount of money the business agrees
to repay by a stated date. Since commercial paper is unsecured, only well-known, financially
stable corporations typically issue it.
Credit cards are used by about half of all small businesses to form or expand the business.
Credit cards provide a readily available line of credit to a business that can save time and the
likely embarrassment of being rejected for a bank loan. They are extremely risky and costly.
Credit cards are an expensive way to borrow money and are probably best used as a last resort.
Equity capital represents money raised from within the firm or through the sale of ownership in
the firm.
The major sources of equity capital are sale of stock, retained earnings, and funds provided by
venture capital firms.
A share of stock represents a share of ownership in a corporation. The corporation's board of
directors normally decides how many shares of stock will be issued and authorizes the sale of
stock to the public. However, before a company can issue shares for sale to the public it must
meet requirements set by the Securities and Exchange Commission (SEC).
Retained earnings are the profits a company keeps and reinvests. This is a very attractive source
of funds, because it saves the firm from having to pay the interest, dividends, or underwriting
fees associated with issuing securities. Moreover, unlike new stock issues, this source of
financing does not dilute ownership. Obviously, however, this source of financing is limited by
the amount of profits the firm has available.
Venture capital firms provide funds to new companies that they believe have great profit
potential. Venture capitalists generally provide their funds in exchange for a share of ownership
in the firm. They also typically expect a high rate of return on their investment. Many famous
companies, including Intel, Apple, Cisco, and Uber received funds from venture capitalists when
they were just starting out.
The two forms of debt financing are (1) selling bonds, and (2) long-term loans from individuals,
banks, and other financial institutions.
Long-term loans are usually due within 3 to 7 years but may extend to 15 or 20 years. A term-
loan agreement is a promissory note that requires the borrower to repay the loan with interest in
specified monthly or annual installments. Loans usually require the payment of interest to the
lender. The lender requires a higher interest payment to compensate for higher-risk loans.
A firm or government issues bonds, in return for a large sum of money. The bond is an IOU that
is held by the bondholder until the borrowed funds are repaid at a future designated date. The
bond indenture specifies how and when bondholders will receive interest payments for lending
their money to the institution. Bonds are like other forms of long-term debt; they may be secured
or unsecured (debenture bonds).
A bond is a corporate certificate indicating that a person has lent money to a firm. A company
that issues bonds has a legal obligation to make regular interest payments to investors and to
repay the entire bond principal amount at a prescribed time. This definition contains the major
elements involved in bond issues.
A bond must have a principal, which refers to the face value of a bond. Bonds are almost always
originally issued in denominations of $1,000.
Bonds offer interest to investors as a condition of their lending money to the firm. Interest rates
vary according to the state of the economy, the reputation of the company issuing the bond, and
the going interest rate for government bonds or bonds of similar companies. It's important to
recall that bond interest must be paid when due. A bond is issued with a specific interest rate
attached to it. This rate does not change throughout the life of the bond.
A bond has a specified date when the bond issue will be repaid. This date is referred to as the
maturity date.
Classes of bonds include both secured and unsecured issues. Secured bonds are backed by
collateral in case they should default. Unsecured bonds usually pay a higher interest rate since
they are not backed by collateral and investors are subject to added risk. The most common type
of bond issued by well-respected companies is a debenture bond (unsecured). There are many
other alternative classes of bonds that can be issued.
Students may also mention other characteristics of bonds such as convertible bonds that can be
converted to common stock and callable bonds that can be called back by the company prior to
the date of maturity.
Preferred stock gives owners preference in the payment of dividends and a prior claim on assets
if the company is forced out of business and its assets sold. Preferred stockholders do not have
voting rights in the firm.
Preferred stock may also contain special features not available with common stock. Preferred
stock may be:
● callable.
● convertible into common stock.
● cumulative, meaning dividends accumulate if they are not paid on schedule.
Common stock is the most basic form of ownership in a firm. In fact, if a company issues only
one type of stock, by law it must be common stock. Holders of common stock have the right (1)
to vote for company board directors and important issues affecting the company and (2) to share
in the firm's profits through dividends, if approved by the firm's board of directors. Common
stockholders also have a preemptive right, which is the first right to purchase any new share of
common stock the firm decides to issue.