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Year 1 Accounting (AUT EXAM) > Accounting for Different Organisations > Flashcards

Accounting for Different Organisations Flashcards

Week 10

1
Q

What is a Partnership?

A
  • 2-20 People on business together, to make a profit
  • Similar to Sole Trader- as it is easy to set up
  • Have a “Partnership Agreement”; Not necessarily a paper agreement
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2
Q

What is included in a Partnership agreement?

A
  • Capital contributions
  • Profit Sharing Ratio
  • Interest on capital before profits
  • Interest charged on drawings
  • Salaries and wages
  • Dissolution of disputes
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3
Q

Why would you start a Partnership?

A
  • More capital can be raised
  • Higher skill levels and expertise
  • Responsibility of Management is shared
  • Access a bigger network of contacts
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4
Q

What is the difference between Partners and Sole Traders?

A
  • SOFP shows the Capital Contributions of each partner
  • Appropriation Account at the bottom of the Income Statement tells us the share of Profit
  • Each Partner has two separate DEBK accounts
  • Capital- Each Persons contributions
  • Current- Balance of Profits, Drawings, Interest from capital or on drawings and salaries
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5
Q

What are some issues with a Partnership?

A
  • Profit is shared
  • Control is Diluted
  • Possibility of disputes
  • Unlimited liability- no ring-fencing between business and person
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6
Q

What are Limited Companies

A
  • ‘Artificial’ Legal Person- separate from the individual
  • Capital Divided into shares
  • Owners become members/shareholder
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7
Q

Why would you start a LLC?

A
  • Perpetual Life- LLCs don’t end after someone dies
  • Limited Liability- only the invested amount is lost
  • Cheap and Easy to set up
  • Good for bigger firms
  • Substantial capital can be raised
  • Delegation of management
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8
Q

Explain the process of setting up a LLC

A
  • Register with the Registrar of Companies (incorporation)
  • Application must state name, type and HQ of the company
  • Application to be accompanied by – Memorandum of Association, Articles of Association, Statement of Capital
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9
Q

What is a PLC?

A
  • Can go Public on the Stock Exchange
  • Require minimum capital of £50,000
  • Need at least 2 shareholders
  • Must hold an AGM
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10
Q

What is a Ltd firm?

A
  • Cannot offer shares to the public
  • Owner/director type companies
  • Can have one or more shareholders
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11
Q

What are some issues with a Limited Company?

A
  • Ltd companies are subject to strict legal control
  • Publicity- Lack of Confidentiality, hence you lose the competitive advantage
  • Delegation of management to a few can be detrimental
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12
Q

What is management and what are the responsibilities?

A
  • Management is the running of a company being delegated to directors
  • They are responsible for keeping proper books of accounts and providing shareholders with financial statements (STEWARDSHIP)
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13
Q

What do Shareholders receive and how can they receive it?

A
  • Shareholders receive money as dividends
  • Director promises dividends at AGM but must be agreed by shareholders
  • Dividends paid out of reserves
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14
Q

What are the 2 Types of Reserves?

A
  • Revenue Reserves
  • Capital Reserves
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15
Q

What are Revenue Reserves?

A
  • Revenue reserves are created out of revenue profit from normal business operations
  • Available to shareholders for dividend payments & help to strengthen position
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16
Q

What are Capital Reserves

A
  • Capital reserves are created out of capital profit, which is profit on disposals
  • These are used to meet capital losses
17
Q

What is the order of Dividends Payments?

A
  1. Share capital- at par value
  2. Capital reserves- share premium
  3. Revenue reserves- retained profits
    - Only 3 is available for dividends
18
Q

What is a Strategic Report?

A
  • Should provide a company’s shareholders with a holistic and meaningful picture of a company’s business model
  • Strategy, risks, development, performance, position and prospects including non-financial information
19
Q

Describe the function of Annual Strategic Reports

A
  • Ensures the accountability of the firm
  • Takes forms of SOFP, Income Statement, Cash Flow Statement and CSR concerns
  • True and Fair view of company affairs; must be open and transparent
  • Auditors report- assessment by an accountant to guarantee shareholders
20
Q

What is the Statement of changes in Equity?

A
  • It is an account of what has been done with the profits
  • Follows an Income Statement for a limited company
  • It includes Share Capital, Share Premium, Revaluation Reserve, Translation Reserve and Retained Earning
21
Q

What is the UK Corporate Governance?

A
  • Established in 2018
  • Applies to all companies who wants to list on the UK Stock Exchange
  • Employs a “Comply or Explain” strategy
22
Q

What are the 5 areas of the UK Corporate Governance?

A
  1. Board Leadership & Company Purpose
  2. Division of Responsibilities
  3. Composition, Succession & Evaluation Board of Director
  4. Audit, Risk and Internal Control
  5. Remuneration-sharing profits
23
Q

Which Principles of Accounting is the UK Corporate Governance based on?

A
  • Accountability
  • Transparency
  • Probity
24
Q

Why do they employ Corporate Governance?

A
  • Businesses need funding from investors to expand and grow
  • The have to signal to investors that they are responsible and stable, hence investors will want to invest
  • Important to reduce risk, stimulate results, better access to capital and showing good CSR
25
Q

What is the difference between Corporate Governance and Management?

A
  • Governance is Board of Directors designed to be accountable & to decide policies
  • Management is the day-to-day running of an operation by CEOs or such
26
Q

What are the 6 core Characteristics to committing to CSR?

A
  • Understanding the impact on security
  • Building capacity & working with others
  • Questioning ‘business as usual’ to improve
  • Stakeholders relations and working with them
  • Strategic view, ensuring that CSR is adhered to
  • Harnessing Diversity and Employment Practice
27
Q

What are the differences between Business Risk and Financial Risk?

A
  • Business Risk; Industry-specific, usually applies to all, some variation for size an diversity
  • Financial Risk; Firm-Specific (due to debt), Financial specific determines risk
28
Q

What are the Sources of Business Finance?

A
  • Short-Term (up to 1yr)
  • Medium-Term (1-10ish yrs)
  • Long-Term (indefinitely)
29
Q

What are the Examples of Short-Term Finance?

A
  • Factoring (3rd Parties)
  • Invoice Discounting (You chase them up)
  • Bank Overdraft
  • Trade Credit
30
Q

Explain Factoring in more detail

A
  • Financial institution takes over company collection of TR
  • Pay 80-85% of invoices in cash upfront
  • Other 15-20% comes when TR pays factor
  • Fixed fee (2-3% of sales) for TR management service
  • % charge for cash advanced to company (interest)
  • Frees personnel to run the business, not chase debts
  • Good as makes Finances more certain
  • Bad as it makes it seem they cannot finance business operation
31
Q

Explain Invoice Discounting in more detail

A
  • Similar to factoring, but cheaper
  • Costs around 0.2-0.3% of Turnover
  • Pay 80-85% of invoices in cash upfront
  • Company agrees to pay ID company within 60-90 days regardless of whether TR have paid them
  • Company retains responsibility for collecting TR
  • Confidential service
32
Q

What are the Examples of Medium-Term Finance?

A
  • Loan
  • Hire Purchase
  • Lease (Operating{rental}/Finance{Long-term})
33
Q

What are the Examples of Long-Term Finance?

A
  • Debt (Long-Term Loans)
  • Equity (Comes from Shareholders)
34
Q

If a firm liquidates, what is the order in which the repayments are made?

A
  1. Lenders/TP
  2. Preference Share (Fixed Dividends, no AMG)
  3. Ordinary Share (Riskier, but more control)
35
Q

What is Gearing?

A
  • The same as Leverage
  • The ratio between Debt and Equity
  • Increased debt, Increase risk, Increased Gearing
36
Q

What are some Advantages of Gearing?

A
  • ‘Gearing Effect’ can be used if borrowing exceeds interest charges. Surplus can go to dividends
  • Lower required returns; Interest Vs. Dividends (based on liquidation time-frame)
  • Asset Matching- Match Loan ∝ Asset Life
  • No dilution of control - Each shareholders shares remain
37
Q

What are some Disadvantages of Gearing?

A
  • Financial Risk- Obligation to pay interest and make capital repayments
  • Loan Covenants- Protect investors investment- some restrictions are put on
  • Shareholder returns- Shareholders may demand higher returns for the generated risk
38
Q

Why does timeframe matter?

A
  • Matching: Is it appropriate to match asset to liability?
  • Flexibility
  • IR
  • Refunding and Cost

Year 1 Accounting (AUT EXAM) (8 decks)

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