Exam Revision

Question 1

Trading business

Answer 1

Buys and sells inventory
A retailer is a business that sells inventory to the public
A wholesaler is a business that purchases inventory from a manufacturer and sells this inventory to a retailer

Question 2

Service business

Answer 2

Provides a service to a customer in exchange for a fee

Question 3

Sole trader

Answer 3

Is a business owned by one man or woman

Question 4

Advantages of being a sole trader

Answer 4

Easier and less expensive to establish and operate

Sole trader does not have to share the profit with other owners

Question 5

Disadvantages of being a sole trader

Answer 5

Liable for all the debts of the business
One person may not have enough money to start or expand a business
Limited sources of advice when making business decisions
Business may have to close or be sold if sole trader has a serious illness
Any losses made by the business cannot be shared with other owners
Sole trader will find it more difficult to take annual holidays

Question 6

Partnership

Answer 6

Is a business, other than a company, that is owned by two or more people. The number of members of a partnership is limited by law. Max of 20 people

Question 7

Advantages of a partnership

Answer 7

Two or more partners maybe able to raise more capital than can one sole trader
Partners contribute different skills to the business
Partners share the workload of operating a business
One partner can cover for another partner who is sick or on holiday
Partners share the risks and losses of the business

Question 8

Disadvantages of a partnership

Answer 8

Partners are jointly and severally liable for all the debts of the partnership
Conflict over business policy or personality clashes can occur. Can end the partnership
Has a limited life
Any profit made by the business must be shared between a number of people

Question 9

Partnership Ageememt

Answer 9

1. The aims of the partnership
2. The profit or loss sharing ratio
3. The voting procedures as meetings of partners
4. Procedures to be followed in the event of the retirement or death of a partner and procedures to be followed for the admission of a new partner

Question 10

Corporations act 2001

Answer 10

All aspects of company formation and certain aspects of company operation are controlled by an Act of the commonwealth parliament known as the corporations act 2001

Question 11

Company

Answer 11

An organisation established under the Corporations Act 2001 as a separate legal entity. A company can make contracts in its own name, can own property and can sue and be sued in its own name.

Question 12

Capital of a company

Answer 12

The money or other resources that a person invests in a business is known as capital. The capital of he company is divided into shares. Each share is given a money value. People purchase these shares and become the owners of the company. Known as shareholders

Question 13

A company limited by shares

Answer 13

One in which the liability of the shareholders for company debts is limited to the amount owing on their shares

Question 14

Proprietary company

Answer 14

Is a company that cannot raise money from the public. Must have at least one shareholder and max 50 non-employee shareholders. Must have the word “proprietary” or “Pty” included in its own name

Question 15

Small and large proprietary companies

Answer 15

A small proprietary company must satisfy any two of the following three conditions

1. The revenue for the year is less than 25 million
2. He assets at the end of the year are less than 12.5 million
3. The company has less than 50 employees at the end of the year

Question 16

Advantages of a company limited by shares

Answer 16

The death of a shareholder does not end the company as it is a separate legal entity
Shareholders of a company limited by shares have the protection of limited liability

Question 17

Disadvantages of a company limited by shares

Answer 17

A company is subject to much greater regulation

A company is more expensive to form

Question 18

Sources of finance

Answer 18

Loans from family or friends
A credit card
A bank overdraft 
A term loan 
Lease finance 
Factoring

Question 19

Credit card

Answer 19

Short term source of finance for a business, paid within a few months. Very expensive form of short term borrowings unless it is paid off within the interest free day periods

Question 20

Bank overdraft

Answer 20

Is a loan made by a bank in which the customer can withdraw more money from his or her bank account than had been deposited in the account.

Question 21

Term loan

Answer 21

Long term source of finance obtained by the bank, paid back after a number of years

Question 22

Accounting

Answer 22

Is a system of recording and processing business events and reporting to people on the performance of a business

Question 23

The accounting process

Answer 23

Documenting events

Recording events

Processing events

Reporting to people

Question 24

Accounting assumptions

Answer 24

Set of beliefs that accountants have about how an accounting system works

Question 25

Monetary assumption

Answer 25

All business events can be measured in terms of money. A business event must be given a money value before it can be recorded in an accounting system

Question 26

Business entity assumption

Answer 26

A business is separate from the owner of the business. The personal actions of the owner are not recorded in the accounting system of a business

Question 27

Accounting period assumption

Answer 27

Life of a business is divided into intervals of time known as accounting periods. Income sheet prepared for each accounting period

Question 28

Going concern assumption

Answer 28

A business will exist for the foreseeable future. Allows assets to be valued at their purchase price in a balance sheet

Question 29

Accounting principles

Answer 29

Set of rules for making entires in an accounting system, and preparing accounting reports

Question 30

AASB accounting standards

Answer 30

Australian accounting standards board has issued a set of accounting rules that companies listed on the stock exchange and some other organisations must follow when they prepare accounting reports for their owners

Question 31

SAC 1- definition of the reporting entity

Answer 31

The statement of accounting concept defines those entities which are reporting entities. It states that an entity is a reporting entity if it is reasonable to expect the users of financial reports who are dependent upon them for information which will be useful for making and evaluating decisions about the allocation of scarce resources

Question 32

SAC 2- objectives of general purpose financial reporting

Answer 32

The statement focuses on the objective of general purpose financial reports in order to make them useful for dependent users. Objectives: General purpose financial reports should provide information useful to users for making and evaluating decisions about the allocation of scarce resources GPFRs should provide information in a manner which assists in discharging the accountability of management

Question 33

Assets

Answer 33

Is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity

Question 34

Liabilities

Answer 34

Is a present obligation of the entity arising from past events, the settlement of which is expected to result in an overflow from the entity of resources embodying economic benefits

Question 35

Equity

Answer 35

Is the residual interest in the assets of the entity after deducting all its liabilities

Question 36

Accounting equation

Answer 36

Assets= liabilities + equity

Question 37

Goods and services tax

Answer 37

Is a 10% tax that is added to the price of most products sold by a business in Australia and on products imported into Australia

Question 38

GST free supplies

Answer 38

``` Fresh food Medical services Education Child care services Exports ```

Question 39

Get registration

Answer 39

A business that has annual sales of $75000 or more must register with the Australian taxation office to collect GST and must charge GST on the products that it sells unless these products are exempt from GST

Question 40

Australian business number

Answer 40

Is an 11 digit number that is issued to a business and helps the ATO ensure that the business pays the correct amount of tax

Question 41

Business activity statement

Answer 41

A business that has to pay GST will have to send the ATO, along with a cheque, a statement setting out the GST payable and the GST input tax credits

Question 42

Questions to decide if GST should be charged on transactions

Answer 42

1. Is this a business activity 2. Has the business received consideration 3. Is the transition connected to Australia 4. Is the product exempt from GST

Question 43

General ledger

Answer 43

Is a pm accounting record that contains a number of files

Question 44

Features of the general ledger

Answer 44

Is made up of a series of files known as ledger accounts Every type of asset, liability, equity, income and expense has its own ledger account A ledger account has two sides Each side of a ledger account has a date, cross-reference and amount column

Question 45

Trail balance

Answer 45

Is the list of the names and balance of each ledger account on a particular day. Has a debit column and a credit column. Entries in each column are totalled. The total of the debit column of a trail balance should always equal the total of the credit column

Question 46

Purpose of preparing a trail balance

Answer 46

Detect errors made in posting information into the general ledger Provide a list of general ledger account balances from which are prepared important accounting reports

Question 47

Errors found by preparing a trial balance

Answer 47

Failing to record part of a transaction in the ledger Making two debit entries or two credit entries in the ledger Making a transposition error in the ledger Incorrectly calculating a ledger account balance Recording a ledger account balance on the wrong side of the trail balance

Question 48

Errors not found by preparing a trail balance

Answer 48

``` Error of omission Error of commission Compensation errors Making an entry in the wrong side of each ledger account Error of original entry ```

Question 49

Balance sheet

Answer 49

Is an accounting report that sets out the assets, liabilities and equity of a business on any one day

Question 50

Capital

Answer 50

Is the money or other resource that the owner has invested in a business

Question 51

Income statement

Answer 51

Made up of income and expenses | Includes profit and loss

Question 52

Inventory

Answer 52

Assets held for resale in the normal course of business

Question 53

Perpetual inventory system

Answer 53

Trading stock purchased is recorded in an inventory ledger account. Two seperate ledger entries are required to record the sale of the inventory

Question 54

Advantages of the perpetual inventory system

Answer 54

Short term income statements can be prepared as the cost of sales is known at any time The possibility of running out of inventory is reduced as the business owner knows how much trading stock is left after each sale Fast and slow moving inventory lines can be easily identified

Question 55

Disadvantages of the perpetual inventory system

Answer 55

I more expensive to set up than the periodic inventory system

Question 56

Internal control

Answer 56

Set of business rules that are designed to protect the assets of the business to prevent fraud and to ensure the the business operates efficiently

Question 57

Manufacturing business

Answer 57

Converts raw material into finished products