Semester 1 Exam Flashcards
(74 cards)
1
Q
Types of Businesses
A
Merchandise
Service
Manufacturing
2
Q
Merchandise
A
generate profit by purchasing stock and reselling it at a higher price. Coles, bunnings, Harvey Norman are all examples.
main costs is stock
3
Q
Service
A
generate profit by providing a service to their customers, examples include telstra, ace cinemas, a plumber and an accounting firm.
main costs is wages
4
Q
Manufacturing
A
earn profits by purchasing raw materials or components and converting them into products, which are then sold on to other businesses, or sometimes directly to customers. examples include Motor vehicle makers, wine brewers or a surfboard maker.
5
Q
Business Structures
A
sole trader
partnership
company
6
Q
number of owners (sole trader)
A
1
7
Q
cost to setup (sole trader)
A
Cheap and easy
8
Q
Share of profits (sole trader)
A
Owner gets all
9
Q
who pays tax to government (sole trader)
A
Pays own tax
10
Q
legal or accounting entity (sole trader)
A
accounting entity
NOT a legal entity
11
Q
limit of liability (sole trader)
A
unlimited liability
12
Q
advantages (sole trader)
A
- full control
- all profits
- work own hours
- ease of formation
13
Q
disadvantages (sole trader)
A
- owner wears all the losses
- if money is borrowed, could lose valuable assets if business goes bust
- lack of skills or expertise
14
Q
name of owner (sole trader)
A
Proprietor
15
Q
number of owners (partnership)
A
2-20
16
Q
costs to setup (partnership)
A
Cheap and easy
17
Q
share of profits (partnership)
A
profits are shared amongst partners
18
Q
who pays tax to government (partnership)
A
each partner is taxed on share of partnership profits
19
Q
legal or accounting entity (partnership)
A
accounting entity
NOT a legal entity
20
Q
Limit of liability (partnership)
A
Unlimited liability
21
Q
advantages (partnership)
A
- ease of formation
- limited rules and regulations apply
- provision of capital and expertise
- possibility of reduced income tax
22
Q
disadvantages (partnership)
A
- limited life
- unlimited liability
- mutual agency
- sharing of profits
23
Q
Name of owner (partnership)
A
Partner
24
Q
number of owners (private company)
A
1-50
25
costs to setup (private company)
expensive to set up
26
share of profits (private company)
shareholders get profits in the form of dividends
27
who pays tax to government (private company)
company pays own tax. 30%
28
legal or accounting entity (private company)
accounting entity and a legal entity
29
limit of liability (private company)
shareholders have limited liability
30
advantages (private company)
- separate legal entity
- limited liability
- more capital
- ease of transfer of ownership
- no mutual agency
- professional management
- continuous existence
31
disadvantages (private company)
- highly regulated
- separation of ownership and control
- cost
- tax from $1
32
name of owner (private company)
shareholder
33
generally accepted accounting principles
- accounting entity
- going concern
- double entry
- monetary
- period
- accrual vs cash
- historical cost
34
accounting entity
- a business is separate from the owner of the business.
- accounting records of the business must be maintained separately from the personal financial records of the owners.
- every business is an accounting entity, however not every accounting entity is a legal entity.
35
monetary
- all transactions are recorded with a monetary value. no barter transactions can be recorded.
- all transactions must be recorded in Australian dollars, if a transaction occurs in a foreign currency, a currency conversion must be applied to convert into Aus dollars.
36
going concern
- it is assumed that once a business has commenced trading it will continue to do so for the foreeable future.
- allows assets to be valued at historical cost in the balance sheet.
37
accounting period
for the purpose of reporting and comparison, the life of an enterprise is divided into specified time periods.
the accounting period cannot be greater than 12 months.
-monthly
-quarterly
-half yearly
-annually
38
accrual accounting
records income and expenses as follows -
INCOME is recorded in the accounting system when inventory is sold or when a service is provided - it is not recorded simply when the cash is received, as this could be in some instances 30 or 60 days after the event.
EXPENSES are recorded in the accounting system when a service is provided, when the invoice for an item of inventory is received, or when an asset is consumed - not recorded simply when the cash is paid.
39
historical cost
in the accounting records of a business, all assets will be valued at their original cost to the business.
some assets however like land may gain value overtime and therefore be revalued
40
accrual vs cash
the difference lies in the timing of when sales and purchases are recorded in the account.
Cash accounting recognises revenue only when the money changes hands
accrual recognises revenue when its earned, and expenses when they are billed.
41
double entry
every transaction has a two-fold effect, each part affecting one or more of the elements of the accounting equation in such a way that it remains in balance. (every transaction must have an equal debit/credit)
42
basic terms found in financial reports
```
assets
liabilities
income
expenses
equity
```
43
define assets, example
defined as a resource controlled by an entity as a result of a past event. a resource is an item that represents a future economic benefit for the business.
machinery, motor vehicles, cash, land, accounts receivable, inventories, artworks, patents and other intellectual property (intangibles) etc etc
44
define liabilities, example
defined as a present obligation of the entity arising from past events, the settlement of which will result in a future outflow of resources of the business.
bank loan, trade creditors (payables) for goods and services provided on credit, etc.
45
define income, example
expressed as increases in economic benefits during the accounting period as inflows or increases of assets or decreases of liabilities that increase the worth of the owner's investment (equity) other than those inflows relating to contributions by the owner of the business.
revenue, such as sales
46
define expenses, example
decrease in the economic benefits of a business during the accounting period in the form of outflows of assets or increases in liabilities that have the effect of reducing the owner's equity other than the owner withdrawing equity.
wages, insurance, advertising, cleaning, depreciation of assets, etc.
47
define equity, example
formal term for the owner's contribution to or interest in the business, often called 'capital'. Equity is the residual interest in assets after the external liabilities have been subtracted.
owners capital
48
accounting equation
A + E = L + I +Eq
49
internal sources of finance
known as equity finance. Includes;
- capital contributed by the owners, including capital introduced by additional owners as partners, or if in terms of a company, shareholders.
- retained earnings; after a business has made a profit it usually distributes some of the profit as drawings or dividends.
owners may contribute finance or capital in the form of cash or other non-cash assets such as vehicles or machinery.
50
external sources of finance
funds provided by people or businesses who are not owners of the business. The business will, therefore, have a liability to pay back the funds and also pay costs to service the loans. These external funds are shown as LIABILITIES on the balance sheet and the costs shown as financial expenses in the income statement. There are many external sources of finance, some are as below.
- an overdraft - this is a bank lending agreement under which a business is allowed to make payments in excess of any current 'cash at bank' balance.
- a term loan - source of finance from a bank or a finance company that is borrowed for a set period of time and has to be repaid at the end of this term.
- trade credit - when a business buys on credit and is given a period of time to pay, it is essentially using the supplier's funds to help finance the business.
some more include factoring and credit cards.
51
collateral
this is essentially security for a loan.
if someone fails to pay back the amount owed at the end of a loan period, their assets can be sold and the proceeds used to recover the amounts owing.
52
Liquidity
does the business have adequate cash flow to be able to pay interest and other fees at the regular due dates.
53
Guarantors
these are people other than the borrower who are prepared to guarantee that the borrower can pay interest and loan principal when due.
54
what are internal controls ?
the procedures and processes in place within a business designed to ensure effective and efficient operations and achievement of the business's objectives.
55
what a creditors
suppliers - people to whom we owe money
56
what are debtors
customers - to whom goods have been sold on credit, and who owe money
57
limitations of internal control
- too expensive
- collusion
- computer fraud
- human involvement
58
collusion
when two or more people conspire as one to commit a fraud.
59
computer fraud
now that most businesses make use of computer accounting systems, because this process often only involves one person, segregation of duties and checking procedures is more difficult to implement. the people who operate these systems by themselves may commit a fraud and it is hard to detect.
60
human involvement
the internal control systems will only be as effective as the personnel involved. some people may find ways around internal control procedures - this is when errors or fraud may occur
61
what is GST
Goods and Service Tax
62
rate of GST
10%
63
what goods and services are exempt from GST
- most basic foodstuffs
- certain medical supplies, medicines and medical equipment
- certain educational supplies and services
- some childcare and supplies to retirement villages and the disabled
64
what services are 'input taxed'
- residential rent
| - financial supplies (e.g. lending money and trading in securities)
65
who must register for GST?
every business with an annual turnover greater than 75 000 is required to register for GST. It is optional if the annual turnover is below 75 000.
66
two main purposes of the trial balance *** KNOW
1. by listing and totalling separately all the debit and credit balances in the ledger, it will check, to some extent that the data entry has been done correctly.
2. the balances listed in the Trial balance can conveniently be used in the preparation of the firms' financial statements for that period.
67
errors NOT revealed by a trial balance *** KNOW
- the same incorrect amount entered into both sides of the ledger
- amounts entered into the wrong sides of both accounts
- the wrong account debited and/or credited
- transactions ommitted together
- transactions duplicated
- compensating errors - where one mistake is exactly cancelled out by another mistake of the same amount in the other direction
68
errors revealed by a trial balance *** KNOW
- wrong positions of transactions in ledgers
- wrong totalling of amounts
- wrong balancing of accounts
- wrong casting of the day books
- wrong recording of an amount in the journal
69
Bankruptcy act 1966 DEFINITION
Definition: when an individual is unable to pay business and/or personal/private debts as and when they fall due. The person is declared "insolvent" (meaning they have no cash to pay debts)
70
Process of the bankruptcy act
1) a trustee in bankruptcy is appointed to manage the affairs of the bankrupt.
2) all debts are "frozen" at the time of appointment of trustee
3) The trustee and bankrupt will compile a statement of financial affairs. (i.e. a list of assets and liabilities).
4) The trustee will allow the bankrupt to keep some personal assets. e.g. household furniture, a motor vehicle (one of low value) and personal effects.
5) The trustee will sell all assets (liquidate assets) to pay off creditors.
71
How to avoid bankruptcy
- keep good financial records
- don't get into too much debt
- don't go guarantor for other people.
- always do a budget. Cash in and cash out.
72
Corporate Social Responsibility (CSR)
The reporting of societal impacts and environmental impacts of the commercial activities of a business. I.e. The ethical and legal behaviour of the business.
Being a "good corporate citizen"
73
Benefits of the corporate social responsibility (CSR)
- Goodwill towards the community by sponsorships donations.
- "feel good" factor for staff morale, and keeping good staff (low turnover)
- positive community recognition of brand
- increase business from community
74
cost of corporate social responsibility (CSR)
Money to pay sponsorship and donations.
