Revision 1

Question 0

Trading business

Answer 0

Buys and sells inventory. Inventory consists of products purchased by a business with the intention of re-selling these products at a profit

Question 1

Manufacturing business

Answer 1

Converts raw materials into finished products

Question 2

Two types of trading businesses

Answer 2

Retailer- business sells inventory to public

Wholesaler- purchase inventory from manufacturer and sells the inventory to a retailer

Question 3

Service business

Answer 3

Provides a service to a customer in exchange for a fee

Question 4

Sole trader

Answer 4

Business owned by one man or woman. Can for example run a deli, operate business as a plumber, accountant, watch repairer

Question 5

Advantages of being a sole trader

Answer 5

Easier and less expensive to establish

Does not have to share profit with other owners

Question 6

Disadvantages of being a sole trader

Answer 6

Liable for all 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 business cannot be shared with other owners
More difficult to take annual holidays

Question 7

Partnership

Answer 7

Business, other than a company, that is owned by tow or more people. Number of members limited by law, max -20

Question 8

Advantages of a partnership

Answer 8

May be able to raise more capital than sole trader
Contribute different skills to business
Share the workload of operating a business
One partner can cover for another partner who is sick or on holidays
Share the risks and losses of business

Question 9

Disadvantages of a partnership

Answer 9

Jointly and severally liable for debts
Conflict over business policy or personality clashes can occur. Serious enough to end a partnership
Has a limited life
Profit must be shared between a number of people

Question 10

Partnership agreement

Answer 10

Important features of the partnership. Partnership agreement includes:
Aims of the partnership
Profit or loss sharing ratio
Voting procedures at meetings of partners
Procedure to be followed in event of retirement or death of a partner, procedure for admission of new partner

Question 11

Corporations act 2001 (commonwealth)

Answer 11

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 12

Company

Answer 12

Is an organisation established under the corporations act 2001 as a separate legal entity. Can make contracts in its own name, can own property, sue and be sued in own name

Question 13

Capital of a company

Answer 13

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

Question 14

Company limited by shares

Answer 14

The liability of the shareholders for company debts is limited to the amount owing on their shares

Question 15

Proprietary company

Answer 15

Company that cannot raise money form the public. Have at least 1 shareholder and max 50 non employees. Must have word proprietary or pty included in name

Question 16

Small and large proprietary companies

Answer 16

Small proprietary company must satisfy any two of the following three

1. Revenue for year is less than $25 million
2. Aspects at end of a year less than $12.5 million
3. Less than 50 employees at end of year.

Question 17

Advantages of company limited by shares

Answer 17

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

Question 18

Disadvantages of company limited by shares

Answer 18

Subject to much greater regulation

More expensive to form

Question 19

Loans from family or friends

Answer 19

A prospective business owner may be able to borrow money from other family members or from a friend. Terms of loans negotiated between parties

Question 20

A credit card

Answer 20

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

Question 21

A bank overdraft

Answer 21

Loan made by a bank, customers can withdraw more money from his or her bank account than has been deposited in the account. Limit on overdraft amount, interest paid monthly. Short term source of finance

Question 22

A term loan

Answer 22

Long term source of finance obtained by a bank, paid back after a number of years. Bank will consider a number of factors when deciding whether or not to make s loan to a perspective business owner. Factors include:
Quality of the business plan
Collateral available to secure the loan
Capacity of a business to repay the loan

Question 23

Lease finance

Answer 23

A lease is an agreement to rent an item of plant and equipment for a fixed number of months or years

Question 24

Factoring

Answer 24

Is the selling of the amount owing from the debtors of a business for a fee

Question 25

Accounting

Answer 25

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

Question 26

The accounting process

Answer 26

Documenting events- a large number of events may take place in a business Recording events- information in source documents transferred into accounting record/ journal Processing events- information in journal processed in accounting record/ general ledger Reporting to people- transferred into accounting reports- income statement and balance sheet Income statement- report showing profit and loss made by a business for a period of time Balance sheet- assets and liabilities, equity

Question 27

Accounting assumptions

Answer 27

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

Question 28

Monetary assumption

Answer 28

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 29

Business entity assumption

Answer 29

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 30

Accounting period assumption

Answer 30

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

Question 31

Going concern assumption

Answer 31

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

Question 32

Accounting principles

Answer 32

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

Question 33

AASB accounting standard

Answer 33

Australian accounting standards board has issued a set of accounting rules that co,panties listed on the Australian stock exchange and some other organisations must follow when they prepare accounting reports for their owners. Designed to ensure that the information contained in accounting reports is relevant and reliable

Question 34

SAC 1- definition of the reporting entity

Answer 34

The statement of accounting concept defines those entries which are reporting entities. It states that an entity is a reporting entity if it is reasonable to expect the existence of 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 35

SAC 2- objectives of general purpose financial reporting

Answer 35

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

Question 36

Elements of financial statements

Answer 36

``` Assets Equity Liabilities Income Expenses ```

Question 37

Assets

Answer 37

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

Question 38

Liabilities

Answer 38

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 39

Equity

Answer 39

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

Question 40

Accounting equation

Answer 40

Assets= liabilities + equity