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Acc2 Flashcards

0
Q

Disadvantages of cash budgets

A
  • very restraint - must stick to plan
  • based on assumptions and predictions which are subject to error
  • may be too challenging (demotivate staff) or too undemanding (business’s potential not fully realised)
  • managers may make ST decisions that help current budgets but at the expense of damaging future
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1
Q

Disadvantage of debentures

A
  • repayment period may be shorter, so the firm must pay off debenture quicker
  • interest must be paid regardless of profit
  • increases gearing - more risky especially during economic downfall, (during economic downfall, people have less money to spend, so less money to pay loan and interest)
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2
Q

Advise why he should create a PDD

A
  • profits may be over-stated by the amount of the dubious debts, so rather than anticipate the profits, wiser to make a provision
  • concept of prudence
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3
Q

Explain how stock should be valued

A

At lower of cost and NRV

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4
Q

Reasons why computerised inventory may be different to physical stock take

A
  • stolen
  • owner’s personal drawings
  • damaged
  • physical count may be incorrect
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5
Q

Advantages of Debentures

A
  • fixed interest rate, so makes it easier to budget
  • interest rates often lower then PS so saves on costs
  • large sums of many can be borrowed and is only repaid at the end of the time period
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5
Q

Ordinary share advantages (to investors)

A
  • dividends vary according to profit, not such a burden during poor years
  • permanent capital and raises more capital than sole traders, sold to outside investors
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7
Q

Disadvantages of partnerships

A
  • unlimited liability
  • decision making may be longer as all partners must agree
  • shared profits
  • conflicts can occur
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9
Q

Impact on liquidity and profitability or ordinary share issues

A
  • raises more finance, improves liquidity
  • less risky as dividends dont have to be paid but paying dividends will decrease liquidity position
  • ordinary share issues have to effect on profitability, not deducted from IS, only from retained earnings
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10
Q

Disadvantages of Ordinary shares (to investors)

A
  • may not get dividends during poor years and not cumulative
  • during insolvency, o s/h paid off last
  • riskier than preference shares
  • loss of control if bought by someone else
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10
Q

Advantages of preference shares (to investors)

A
  • less risky
  • fixed dividends and cumulative
  • during insolvency, p s/h paid off before o s/h
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11
Q

Importance of applying prudence/consistency when preparing financial statements

A

Users will have confidence in the accounting statements because they represent a true and fair view as they provide a reliable basis for decision making (such as buying shares) in the company and because of the comparability of the information

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12
Q

Advantages of private limited co

A
  • limited liability- if business fails, will only lose initial investment not personal possessions, unlike sole trader
  • more finance, more are willing to invest in Ltd co.
  • company is separate legal entity
  • owner can still make all the decisions if he/she is the only shareholder
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13
Q

Ordinary share issue advantages

A
  • may lose control over the day to day running of the business as major shareholder has dominance over decision making which could be disruptive for the existing management - the finance is never ‘paid off’ there will always be the need to pay dividends
  • dilutes ownership
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13
Q

Rights issue advantages

A
  • ownership of the company remains with existing shareholders
  • gearing not increased
  • finance raised has the benefit of other share issues - money does not have to be repaid
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14
Q

Advantages of bank loan

A
  • agreed repayment period and repayments are made a regular intervals so easy to budget
  • lower interest rates than overdraft
  • better for long periods
    INCREASE GEARING
    Interest decreases profits
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15
Q

Negative reactions of computerised systems

A
  • Threat of redundancies - fewer staff required to carry out same duties
  • fear of change - staff more familiar with old way of doing things
  • need for retraining - staff may see this is an imposition on their time and abilities
  • health issues
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17
Q

Why is it important to distinguish between capital and revenue expenditure?

A

Capital exp. is recorded in BS and revenue is recorded in IS
If incorrectly classified, total FA will be less than they should if cap is classified as rev. Net assets will fall in value. Financial records will not show a true and fair view, which may affect decision making

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18
Q

Advantages of cash budgets

A
  • can identify when theres a shortfall so bank loan/overdraft can be negotiated in advanced rather than when money runs out
  • if surplus, means theres an option for investment or purchase of NCA
  • helps to ensure there is always sufficient cash for the business to continue day to day
19
Q

Why can make profit but have overdraft?

A
  • Other payments - transcations not recorded on PL but does reduce cash, such as purchase of NCA and repayment of loans
  • drawings/dividends - alot of cash may be taken out
  • timing differences - because FS are prepared on accruals basis, profits are realised when a sales invoice has been issued but cash is not receives until TR pay, so can make profit but not have received cash.
  • prepaid expenses, deducted from expenses, increasing profits but then full amount is actually paid reducing cash
20
Q

Usefulness of applying accounting policies and concepts when preparing final accounts

A
  • Very useful, provides guidelines for treatment if acc problems
  • the specific concepts and principles are universal rules used to prepare accounting records so it ensures that everyone treats particular situations in the same way, allowing for comparisons between businesses and yearly reports
  • users will have confidence as they would be RRCU and not bias in any way as all accountants use the same concepts to prepare all accounts
21
Q

Impact on liquidity and profitability of debenture issue

A
  • improves liquidity by $
  • risky as interest must be paid of $ and the loan itself must be repaid in the future which may cause liquidity problems
  • interest paid affects profit as it is charged to the IS
21
Q

Why can have high cash figure but low profits?

A
  • sale of NCA - increases cash but little effect on profit
  • owners bring in more cash - shares are sold, increases cash
  • loans - increase cash but not same effect on profit
  • non-cash transactions - decrease profits
24
Q

Disadvantages of computerised systems

A
  • cost - maintenance and improvements
  • training needs - takes time and may mean that staff cannot carry out existing jobs effectively
  • loss of data - data must be backed up, danger of losing data by virus or hacking, could adversely affect business performance
  • staff demotivation - fear of change and morale and motivation may be affected, therefore affecting productivity
24
Q

Positive reaction of computerised systems

A
  • learn new skills - saves personal time and expense to develop additional skills
  • opportunity to develop new skills because of provision of training by employer
  • enhances career prospects through personal development
25
Q

Advantages of bank loan

A
  • agreed repayment period and repayments are made a regular intervals so easy to budget
  • lower interest rates than overdraft
  • better for long periods
    INCREASE GEARING
    Interest decreases profits
26
Q

Advantages of software packaging

A
  • cost effective - dont need to pay professionals, savings used for something else
  • improve management - provide better and quicker info so better dec-making
  • increased privacy - everything done on her own not by other people, increased security
27
Q

Errors that could have occurred that would cause comp to be lower than physical stock

A
  • error of omission
  • error of original entry
  • processed twice
  • returned goods not entered into system yet
28
Q

Disadvantages of bank overdraft

A
  • higher interest rates coz no collateral security

- when business gets into financial difficulties, back can ask for immediate repayment of full overdraft

29
Q

Why has the owner prepared a cash budget?

A
  • planning - enables him to plan for future and react to changes
  • monitoring - compare budget with actual, to identify variances
  • control - setting ceilings for exp.
  • decision making - about changing spending
  • coordination/communication - coordination of other budgets, communication between diff departments
30
Q

Advantages of computerising records

A
  • speed - processes are automatic
  • accuracy - multi tasking and automatic posting
  • legibility - avoids errors
  • availability of management uptodate info
  • efficiency - better use if resources
31
Q

Advantages of partnerships

A
  • greater expertise and partners may have more skills
  • share workload - partners can cover for each other during holidays and ill
  • access to more capital than ST
32
Q

Disadvantage of private limited co

A
  • shares cannot be sold on stock market, only friends and family, limits ability to raise finance
  • cost of setting up - costs involved in setting up co, in terms of time and money
  • publish accounts - must prepare accounts, and keep proper accounting records. Must be registered at companies house, accounts must be filed there and may have to be auditted
33
Q

Disadvantage of software package

A
  • system failure/virus - need to bacjed up to diff comp system so files and data not lost, if lost could be add, costs
  • cost - maintenance and improvement
  • time - time for staff to learn and so cannot carry out existing jobs
  • health and safety - back/eye strain
34
Q

Preference share issue advantages

A
  • fixed dividends, makes budgetting easier for company

- decreases gearing, low gear is good if profits are falling

35
Q

Preference share issue disadvantages

A
  • dividend payments are long term, all must be paid off

- takes time and costly to issue shares

36
Q

Advantages of bank overdraft

A
  • very flexible, can be borrowed or repaid whenever
  • interest is calculate on daily basis, its charged bases on borrowed amount - although higher interest rates, can be cheaper so reduces interest expense
37
Q

Disadvantages of preference shared (to investors)

A
  • fixed dividends, no chance for capital gain

- no voting rights

38
Q

Disadvantages of bank overdraft

A
  • higher interest rates coz no collateral security

- when business gets into financial difficulties, back can ask for immediate repayment of full overdraft

39
Q

Disadvantages of bank loan

A
  • collateral security required

- must be repaid within time period given plus interest

40
Q

Why prepare cash budgets?

A

Planning - it forces them to forecast sales and expenditure, enables him to plan for future and react to changes
Monitoring - by comparing his budget with actual spending, he can identify variances
Control - setting targets and ceilings for expenditure
Coordination/communication - preparation of CB needs coordination of other departments and communication between diff departments, should result in business achieving its objective

41
Q

Disadvantages of preference shared (to investors)

A
  • fixed dividends, no chance for capital gain

- no voting rights

42
Q

Preference share issue advantages

A
  • fixed dividends, makes budgetting easier for company

- decreases gearing, low gear is good if profits are falling

43
Q

Preference share issue disadvantages

A
  • dividend payments are long term, all must be paid off

- takes time and costly to issue shares

44
Q

Advantages of bank overdraft

A
  • very flexible, can be borrowed or repaid whenever
  • interest is calculate on daily basis, its charged bases on borrowed amount - although higher interest rates, can be cheaper so reduces interest expense
45
Q

Disadvantages of bank loan

A
  • collateral security required

- must be repaid within time period given plus interest

Acc2 (2 decks)

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