Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Accounting Principles > Accounting Test 3 > Flashcards

Accounting Test 3 Flashcards

1
Q

What are the 5 features of a sole trader?

A
  • Person who owns and runs their own business
  • Keeps all their profit (after taxes are paid)
  • Have unlimited liability
  • Are personally liable for the business debts
  • Personal assets may be at risk if they can’t pay their creditors
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are the 2 sources of sole trade financing?

A
  1. Owners capital
  2. Borrowings
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What can borrowings be broken down into?

A

Overdraft
Loan

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Explain what is meant by an overdraft and list the 6 features

A

→ Occurs when the bank balance goes below 0 and beyond
→ Shown as a current liability
→ Flexible
→ Short-term
→ Working capital
→ However, bank can recall at any time

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Explain what is meant by a loan and list the 7 features

A

→ Longer term
→ Shown as a non-current liability
→ Not flexible
→ Differing terms
→ Allows budgeting for payments
→ May need security
→ Allows you to buy assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are the two types of Limited Companies?

A
  1. Private Limited Company (Ltd)
  2. Public Limited Company (Plc)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

List the 5 features of a Private Limited Company

A
  • At least one member
  • Cannot sell shares to public
  • Must have limited or Ltd in name
  • At least one director
  • Money invested by owners is called EQUITY
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

List the 7 features of a Plc

A
  • At least £50,000 issued share capital
  • Name must include Plc
  • At least 2 members
  • At least 2 directors
  • Can sell shares to public
  • Dividend payments expected
  • Vulnerable to take-over bids
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What are the 2 legal statuses of limited companies?

A
  • Separate legal personality:
  • Limited liability
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are 3 methods of financing limited companies?

A
  • Debt (loans)
  • Equity (shares)
  • Usually a mixture of the two
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Explain what is meant by Equity

A
  • Equity is provided by shareholders
  • Company owned and run for benefit of shareholders
  • Shares must include ordinary and occasionally, preference
  • Capital section biggest change
  • Drawings do not appear in limited company accounts, only applicable to sole traders
  • Capital is now referred to as equity
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Explain what is meant by Reserves

A
  • All reserves belong to shareholders
  • Revenue reserves CAN BE distributed as dividends
    i.e. retained earnings from I.S – undistributed profits.
  • General Reserves to guard against events i.e. inflation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Explain what is meant by Capital Reserves

A
  • Cannot be distributed as dividends
    i.e. share capital, share premium, revaluation reserve (adjustment for Increase in value of buildings etc)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Explain the 5 features of Ordinary Shares (equity)

A
  • Voting rights
  • No automatic entitlements to dividends
  • Higher risk
  • Market value usually much higher than nominal value
  • Attend AGM
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Explain what is meant by Ordinary Shares

A
  • All shares have a nominal or par value, usually £1.00, but may be 25p, 50p
  • This is the share capital in the SOFP
  • If the shares are sold for more, any difference goes into Share Premium
    NOTE** NOMINAL VALUE IS NOT THE SAME AS THE MARKET VALUE***
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Explain what is meant by Authorised and Issued shares

A
  • Companies have an authorised amount of shares that they can issue
  • The amount of shares actually issued is shown in the SOFP
    NOTE** THESE MAY NOT BE THE SAME AMOUNTS***
17
Q

Explain what is meant by Dividends

A
  • In large companies, directors propose dividend for approval by shareholders at AGM.
  • Interim Dividend (Paid)
  • Final Dividend (Proposed)
  • Dividend Declared as PENCE per share (Based on the quantity of ISSUED SHARES)
18
Q

Explain what is meant by Preference Shares

A
  • No voting rights
  • Fixed rate dividend
  • Cumulative
  • Paid from after Tax Profits
  • Paid out before Ordinary Dividends
  • Less risky than ordinary shares
19
Q

Explain what is meant by Borrowing (Debt)

A
  • Loan stock or debentures
  • Specified rate of interest
  • Specified period of time
  • No voting rights
  • Safer investment
  • Different types: Convertible, Redeemable, Mortgage debenture
20
Q

List the 5 benefits of Borrowing

A

→ Maintain control
→ If profits increase = more for shareholders
→ Enables expansion
→ Plan cash flow
→ Interest allowable against tax

21
Q

List the 5 dangers of borrowing

A

 Interest and loan must be repaid
 Failure to pay can destroy company
 Consider risk of increased interest rates
 Companies with high borrowing are high risk
 Increased risk to shareholders

22
Q

Explain Retained Profits

A
  • Profit made can be paid as dividends or ploughed back into business
  • Depends on company’s success and dividend policy
  • Usually a mixture of the two
23
Q

What are the 6 other sources of finance?

A
  • Lease rather than buy assets
  • Outsourcing activities
  • Careful working capital management – Debtors-Stock-Creditors
  • Factoring
  • Cost savings
  • Obsolete assets

Accounting Principles (2 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions