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Question 1

What is an asset?

Answer 1

An asset is a present economic resource controlled by the entity as a result of a past event that has the potential to produce future economic benefit.

Question 2

What is a Liability?

Answer 2

A Liability is a present obligation of the entity arising from past events to transfer an economic resource.

Question 3

What is Owners Equity?

Answer 3

The residual interest in the assets of the entity after the liabilities are deducted.

Question 4

Referring to one accounting assumption, explain why the owners equity is said to be what the ‘ business owes to the owner’.

Answer 4

Accounting Accrual assumption—-> as it is the assumption that the elements of the reports are recognized when they satisfy the recognition and definition criteria, and since owner equity is The residual interest in the assets of the entity after the liabilities are deducted, it can be said the that the business owes this to the owner.

Question 5

Accounting Equation

Answer 5

A=L+OE.

Question 6

Referring to the definition of owner’s equity, explain why the accounting equation must always balance.

Answer 6

?

Question 7

What is the balance sheet?

Answer 7

The balance sheet is an accounting report that details a firm’s financial position at a particular point in time by reporting its assets, liabilities and owners equity.

Question 8

What three pieces of information must be present in a balance sheet?

Answer 8

A,L&OE.

Question 9

What is a current asset?

Answer 9

a present economic resource controlled by the entity as a result of a past event that is reasonably expected to be sold, consumed or converted to cash within 12 months after the end of the reporting period.

Question 10

What is a non-current asset?

Answer 10

a present economic resource controlled by the entity as a result of a past event that is reasonably expected to be used by the business for a number of years and is not held for the purposes of resale.

Question 11

What is a current liability?

Answer 11

obligations of the entity arising from past events that are reasonably expected to be settled in the next 12 months after the end of the reporting period.

Question 12

What is a non-current liability?

Answer 12

obligations of the entity arising from past events that are not expected to be settled in the next 12 months after the end of the reporting period.

Question 13

What is liquidity?

Answer 13

The ability of a business to meet its short term debts as they fall due.

Question 14

What is Working-Capital-Ratio?

Answer 14

A liquidity indicator that measures the ratio of current assets to current liabilities to asses the firm’s ability to meet its short-term debts.

Question 15

What is stability?

Answer 15

The ability of the business to meet its debts and continue its operation in the long term.

Question 16

What is debt ratio?

Answer 16

Measure the proportion of the firm’s assets that are funded by external sources.

Question 17

Debt ratio formula?

Answer 17

TA/TL X 100

Question 18

Working-Capital-Ratio Formula?

Answer 18

CA:CL , HAS TO BE $X:$1

Question 19

Explain how a high debt ratio can have negative consequences for liquidity.

Answer 19

B/C—–> A high debt ratio may mean that the firm is largely funded by external sources such as bank loans, this may lead to decreased liquidity as it may mean that the business may need to take further loans to repay their pre-existing loans, this may lead to an inability for the business to meet its short term debts as they fall due.

Question 20

What is a small business.

Answer 20

A business in which the owner and manager are the same person and which employs fewer than 20 people.

Question 21

State 3 Characteristics that distinguish a business as small.

Answer 21

-Independently owned and operated.
- Closely controlled by the owner/manager who also contributes most, if not all of the operating capital.
- The principal decision-making is made by the owner/manager.

Question 22

Identify a factor that determines a business’s size. State the four sizes of business and explain why they are categorized as that size. Give examples of each.

Answer 22

The number of people a business employs determines its size. The four sizes of business are Micro, small, medium and large. They are categorized like this as they employ a different number of people for their business. As Micro businesses employ (1-4) people, Small businesses employ (5-19) people, Medium businesses employ (20-199) and a Large business employs (over 200) people.

Question 23

What is cost price.

Answer 23

The original purchase price of inventory.

Question 24

What is ABN.

Answer 24

Australian business number is a 11 digit number used to identify a business.

Question 25

What is a sole-proprietorship.

Answer 25

Is a business owned by a single individual, operating their business in their own right under their own name or a registered business name.

Question 26

State one reason why the balance sheet is titled ‘as at’.

Answer 26

B/C—–> The accounting equation which is the heart of the balance sheet, which details the firms assets , liabilities and owners equity at a particular point in time, that is why the balance sheet is titled ‘as at’.

Question 27

What is unlimited-liability.

Answer 27

The legal status of sole proprietorship and partnerships is that they are not recognized as separate legal entities so the owner(s) is personally liable for all the debts of the business.

Question 28

What is a partnership.

Answer 28

A business owned by 2 or more persons in business together with a view of to making a profit.

Question 29

What is a proprietary company.

Answer 29

A business that exists as a separate legal entity that is entitled to do business in its own right.

Question 30

What is limited liability.

Answer 30

The legal status of a company that exists as a separate legal entity, so that the owners have no future responsibility for liabilities incurred by the business.

Question 31

What is goodwill.

Answer 31

An intangible asset representing the value of a firm’s reputation, clientele, viability and future growth prospects.

Question 32

What is a share.

Answer 32

A document that verifies part-ownership in a company.

Question 33

What is dividend.

Answer 33

A share of profit earned by a company that is distributed to shareholders.

Question 34

Referring to one accounting assumption, explain the effect of unlimited liability on the recording of transactions for a sole proprietorship or partnership.

Answer 34

Due to the accounting entity assumption, the owner and the business are seen a separate accounting entitles ( not legal entities in both sole proprietorship and partnership). So, because of this, even though the owners personal assets and liabilities are not listed in the balance sheet, they can still be used to pay off business debts.

Question 35

Explain how goodwill can bring both benefits and costs for the purchase of an existing small business.

Answer 35

Good will can serve as a proven track record of the business and increase the chances of success, however, it may need to pay a lot more for the business as it must pay for its goodwill which is difficult to value accurately.

Question 36

Outline two ethical considerations that a new business owner may consider and explain how these considerations could lead to a successful business.

Answer 36

-Impact on the environment( waste is correctly disposed of)—->increased reputation as an eco-friendly business—->increased success.
- Treatment of employees (Employees have safe working conditions and are paid fairly) —->increased reputation as an employee-friendly business—->increased success.

Question 37

Explain why individuals should explore alternative investments when considering starting their own small business.

Answer 37

One reason to consider alternative investments is their potential for higher returns compared to traditional assets. Alternative investments often target niche markets and can serve as an income stream for the individual/business where an asset can generate some type of income such as interest, rent or dividends.