1. Purposes of Accounting and Accounting Framework

Question 1

According to the Australian Bureau of Statistics, a small business employs…

Answer 1

less than 20 people

Question 2

What are the 3 types of businesses?

Answer 2

1. Manufacturing
2. Service providing
3. Trading/Retailing/Merchandising

Question 3

Manufacturing
Characteristics
Examples

Answer 3

Purchase raw materials or components and convert them into products for sale
Manufacturer normally sells goods it makes to retail outlets or sometimes directly to customers

e.g. holden, wine producer, chocolate manufacturer

Question 4

Service Providing
Characteristics
Examples

Answer 4

Provide a service to customers

e.g. Ace cinema, Telstra, plumber, accounting firm

Question 5

Trading/Retailing/Merchandising
Characteristics
Examples

Answer 5

Purchase stock and resell it at a higher price

e.g. Bunnings, Coles, Harvey Norman

Question 6

Types of Business can be divided into 2 parts. What are they?

Answer 6

Number of owners
Industry/What they do?

Question 7

Describe Number of Owners.

Answer 7

Sole Trader
1

Partnership
2-20

Company
shareholders

Question 8

What is another name for income statement?

Answer 8

Profit and loss statement

Question 9

What is another name for balance sheet?

Answer 9

Statement of financial position

Question 10

What does the income statement provide information on?

Answer 10

Provides information about the performance of the business by providing information on the profit or loss it has achieved for a particular period of time

income
profit/loss
expenses

Question 11

Describe the usefulness of the income statement

Answer 11

• if the owner wants someone to invest in the business, he will have to show that the business is profitable
• management needs to know how the business is performing to make decisions about how to allocate resources and where to cut expenses

Question 12

What does the balance sheet provide information on?

Answer 12

shows the financial position of the business
represents information at a particular point in time which states the level of business financial stability

Question 13

Describe the usefulness of the balance sheet

Answer 13

• a variety of stakeholders can make decisions about their investment in the business

Any potential lenders/investors can get info on the following:
- How much finance has been invested in the business?
- Is the business overindebted?
- Can the business meet its financial obligation?
- What kind of assets does the business have?

assets, liabilities, equity

Question 14

Why is cash flow important?

Answer 14

If the business doesn’t have enough cash, it cannot pay its liabilities and expenses. If business cannot pay owner, it may have to close

Question 15

What is liquidity?

Answer 15

The ability of the business to meet its debts as they fall due in short term, generally within 12 months

Question 16

Working Capital= …

If figure positive,
If figure negative,

Answer 16

Working Capital = current assets - current liabilities

Working Capital = CA - CL

If figure is positive,
business has more CA than CL so business can pay of its debts

If figure is negative,
there’s a risk that short term creditors may not get paid, business may need to liquidate (close)

Question 17

What are assets?

What is a CA?
Give examples of CA

What is NCA?
Give examples of NCA

Answer 17

Assets- resources in a business

CA- resources that are likely to be consumed or converted into cash in 12 months or less

Cash at bank
Debtor/Accounts receivable
GST credit
prepaid expenses
stationery supplies
inventory/stock
term deposits (matures less than 12 months)

NCA- resources that will be used in the business for more than 12 months

Motor Vehicle
Land/Building
Office furniture

Question 18

What are liabilities?

What is a CL?
Give examples of CL

What is a NCL?
Gives examples of NCL

Answer 18

Liabilities- money or service owing by a business

CL- amount due by the business that will be paid in 12 months of less

GST payable
Bank overdraft
creditors/accounts payable
accrued expenses
expenses due

NCL- amount due by the business that will be repaid in more than 12 months

mortgage
bank loan

Question 19

Explain the two types of income?

Answer 19

Revenue- the income from the day-to-day operations of the business
a business earns a revenue by selling goods or by rendering a service to customers

Gain- a profit on the sale of a NCA

Question 20

What is equity?

Answer 20

Equity is the value of resources invested by the owner into the business

The owner can bring:
- cash
- non-current assets

Question 21

What is an expense?

Answer 21

A business incurs an expense when in buys goods or when it uses a service