Accounting for Decision Making Flashcards
What is the five-step decision making model?
- Define/Identify the objective
- Obtain relevant information
- Generate feasible options/alternatives
- Make a decision
- Implement and evaluate
How do you solve a system problem?
- Find the point of deviation and establish what caused it
What are the main types of oranisations?
- Business - retail, service
2. Non-business - government, non-profit
What is a business?
An entity or organization that engages in the trading of goods/services - most frequently established for profit
What are the basic forms of business structures?
- Sole Trader/Proprietorship
- Partnership
- Company
What is a sole trader/proprietorship?
- A business owned and operated by one person with full control over assets/decisions
- Minimal regulations - no Act, no reporting requirements no extensive set up cost
- Limited life, unlimited liability, limited funds
What are the advantages of a sole trader?
- Simple and inexpensive to establish and operate
- Minimal financial reporting regulations
- Financial rewards flow directly to the owner
- Timely decision-making is possible
What are the disadvantages of a sole trader?
- Unlimited liability - bears full responsibility for business debts, any legal actions such as negligence
- Limited by skill, time and investment of owner
- Business will cease to exist if owner leaves, retires or dies
A sole trader business:
a) is controlled and managed by an individual.
b) must prepare a tax return even though it is not a tax-paying entity.
c) is a tax-paying entity separate and distinct from its owner.
d) is classified as a separate legal entity.
a) is controlled and managed by an individual.
A sole trader is an individual:
a) who is responsible for all debts.
b) taxed as an individual on the business income.
c) who has total control over the business.
d) all of the options listed.
d) all of the options listed.
What is a partnership?
- Two or more persons
- formal agreement or informal arrangement
- Limited life
- Unlimited liability
- Mutual agency - responsible for eachothers actions
- Co-ownership of assets
- Governed by Partnership Act
What are the advantages of a partnership?
- Simple to set up. An ABN must be applied for.
- Informal business structure - not bound by accounting standards
- Ability to share capital, skills, talents, knowledge and workload between two or more people
- The partnership doesn’t pay income tax on the profit it earns - each partner reports their share of the partnership income in their own tax return. However, the partnership has to prepare an annual tax return.
What are the disadvantages of a partnership?
- Unlimited liability for business debts and obligations
2. Limited life - if a partner withdraws from the partnership, or if a partner dies, then the partnership must dissolve
The withdrawal of a partner legally dissolves the partnership
a) True
b) False
a) True
What is a company?
- An independant legal entity
- Owners are shareholders
- Limited liability
- Unlimited life
- Assets are owned by the company
- Profits belong to shareholders
- Seperation of ownership and management
- Extensive regulation
What is the limit to liability
If your shares are fully paid, you have no liability If you are owing money on your share, your liability is the amount owing.
What is the company regulation?
- Legislation (Corporations Act 2001)
2. Organisations (ASIC, ASX, ACCC, RBA, APRA, ATO etc)
What are the advantages of a company?
- Perpetual existence
- Owners (shareholders) have limited liability
- Greater access to funds:
- Potential taxation advantages - tax rate 30%. Top rate for individuals is much higher.
What are the disadvantages of a company?
- Higher establishment costs and time consuming to establish
- Extensive regulation
- Owners not able to watch everything (separation of ownership and management)
- Limited liability aspect may cause problems, e.g. Banks lending to companies may require director’s personal guarantee
Which of the following statements about companies is not true?
a. It must be dissolved when a partner dies or retires.
b. It is a separate tax-paying entity.
c. It can enter into contracts in its own name.
d. It can sue and be sued.
a. It must be dissolved when a partner dies or retires.
Which of the following is not an advantage of the company form of business?
a. It has an unlimited life.
b. It has limited liability.
c. It has the ability to raise large amounts of capital.
d. It must comply with the Corporations Act 2001 and other legislation.
d. It must comply with the Corporations Act 2001 and other legislation.
What are the types of companies?
- Proprietary companies (Pty Ltd) - private, no more than 50 shareholders
- Public Companies (Ltd)
What are the types of Public Companies?
- Limited by shares (offer shares to the public, at least 1 shareholder and 3 directors)
- Limited by guarantee (owners guarantee to contribute specific amount in case of the company winding up)
- No-liability company (NL) (not liable for amounts owed on shares)
- Unlimited company (shareholders have no limit placed on their liability)
Which of these is true for a public company?
a) It must have at least three directors and at least one shareholder.
b) It may be a no-liability company.
c) Shareholders may have unlimited liability.
d) All of the statements are true.
d) All of the statements are true.
Private companies in Australia must have:
a) at least one shareholder.
b) at least two shareholders.
c) at least three shareholders.
d) more than fifty shareholders.
a) at least one shareholder.
What is accounting?
The process of identifying, measuring and communicating relevant economic information (Business Transactions) about a particular business to a variety of users for making informed decisions.
What are the components of accounting?
- Analytical - identifying data
- Technical - measuring data
- Communication - implies information has value in decision making
What are business transactions?
- External exchange of something of value between two or more entities (one of which is the business firm).
- They can be reliably measured and recorded
- They affect assets, liabilities and equity (see topic 2)
What is relevant information?
Information that makes a difference in decision making.
Accounting information is designed to meet the needs of who?
- Internal Users - Management (special purpose report)
2. External Users - investors etc (general purpose report
Accounting is divided into what two fields?
- Financial Accounting
2. Management Accounting
What is Financial Accounting?
Preparing and presenting financial statements primarily for external parties. Statements are prepared in accordance with Generally Accepted Accounting Principles (GAAP)
What is management accounting?
Preparing internal reports for management to assist decision making (e.g. budgets, production cost report, cost analysis) - Not regulated by rules like financial accounting
What are the core activities in management accounting?
- Formulating plans and budgets
2. Providing information used in monitoring and controlling performance
How is value created?
- when resources in existing form (resources consumed) are transformed to another more valuable form (resources created).
- Value added is the difference between resources created and resources consumed.
- 1 The proprietorship form of business organisation:
a) must have at least two owners.
b) means that the owner is personally liable for business debts.
c) has an indefinite life.
d) is characterised by a legal distinction between the business as an economic unit and the owner
b) means that the owner is personally liable for business debts.
- 1 The partnership form of business organisation:
a) is a separate legal entity.
b) is a common form of organisation for service-type businesses.
c) has limited liability.
d) all of the options listed.
b) is a common form of organisation for service-type businesses.
- 2 If the partnership agreement does not contain profit sharing arrangements, then the Partnership Act states that profits must be shared:
a) according to the amount of time invested by each partner.
b) in proportion to the capital contribution of each partner.
c) equally between all partners.
d) based on capital contributions and time invested
c) equally between all partners.
- 2 The business structures that protect the personal assets of the owners from the creditors of the business are:
a) partnership.
b) company.
c) company and sole trader.
d) partnership and company.
b) company.
What are the 5 elements of a financial statement?
Assets Liabilities Equity Income Expenses
What are the characteristics of an asset?
It must be owned or controlled by the entity
It must result from a past exchange transaction or event
It must be a present economic resource or a right that has the potential to benefit the entity.
An asset may be either:
Tangible - assets with physical substance
Intangible - a non-monetary non-current asset without physical substance
What are the two types of claims against a firm’s assets?
External claims - owed to parties other than the owner
Internal claims - owed to the owner, made up of capital +/- profits, losses, withdrawals
What are the characteristics for a liability?
A present obligation to another entity exists (i.e. the entity has no realistic alternative to settling the obligation).
The present obligation arises as a result of past events.
An outflow of resources embodying economic benefits is expected to flow from the entity as a result of settling the present obligation
What is owners equity?
Equity represents claims of owner/s on the firm, and equals the firm’s net assets
What items are included in Owners equity?
Capital contributed by owners
Amounts paid to owners from profits
Profits retained in the firm
Reserves
What four categories are expenses broken down into?
Cost of Sales (or cost of goods sold)
Selling and distribution
Administration
Finance/Financial
What is cash based accounting?
Records transactions related to income and expense only when cash is received and when cash is paid
What is accrual-base accounting?
Transactions are recorded in the period to which they relate, rather than in the period the entity receives or pays the cash related to the transaction.
What are the steps to analyze the effect of business transactions in the accounting equation?
Identify duality–at least 2 specific accounts, i.e. Identify the accounts involved (inventory? cash? accounts payable? etc.)
Determine classification (i.e. Are the accounts A, L, OE, R, E?)
Determine if accounts increase or decrease
Determine amounts of increase/decrease for each account
