Ch 3

Question 1

External
Users:

Answer 1

-Customers
-Creditors
-Potential Investors
-Government
-Academe
-Public

Question 2

They are people or entities that
acquire goods and services for a fee,
however, even large businesses can be
customers.

Answer 2

Customers.

Question 3

Another source of funds.
They lend their resources to the business in
exchange for a fee or what we called as
interest for using the said resources.

Answer 3

Creditors

Question 4

Similar with creditors. They put their
resources in a business hoping to earn a
decent forward. Investment is like a
gamble, it is either you earn big or lose.
If the business is profitable, they also
receive share of the profits. If the business
is losing, they also suffer from the loss.

Answer 4

Potential Investors

Question 5

To regulate the businesses in the economy,
check if businesses follow guidelines provided
by law in their operations.
They also see if businesses are not trying to
deceive the users of financial statements by
misrepresenting the amount of earnings or
manipulating portions of the company’s
financial statements.

Answer 5

Government

Question 6

They do not usually transact with
businesses, the group utilize
financial statements for academic purposes.

It is not confined only in the accountancy
field, it can be used also in other fields of
study such as banking and finance,
entrepreneurship, and economics.

Answer 6

Academe

Question 7

Financial statements gives us hints about
the condition of the economy.
If it not
good, the general public will minimize their
spending and increase savings. It will also
identify if possible new jobs in the industry
will exists due to good economy

Answer 7

Public

Question 8

Internal Users:

Answer 8

-Management
-Employee
-Owners / Stockholders

Question 9

All managers must know the company inside and out. By examining
financial statements, managers are able to identify problems and
respond to them accordingly.

Answer 9

Management

Question 10

use financial statement for
personal reasons. They are concerned with
the company’s profitability.
❑ compensation
❑ Additional benefits (year-end bonuses,
fringe benefit, remuneration packages,
termination pay)

Answer 10

Employees

Question 11

want to know if their
investments will yield acceptable returns.
A profitable business keeps its investor
happy

Answer 11

Owners / Stockholders

Question 12

Fundamental
Business Model

Answer 12

Initial Cash Investment

Use cash to buy
additional assets or
pay operating costs
Produce products or
services

Sale of Products or
services (Cash or On
Account)

Use available cash to
pay debts, convert
into other assets, or
spent on operating
costs (after-tax)

Question 13

Types of Business:

Answer 13

-Service Business
-Merchandising Business
-Manufacturing Business
-Hybrid Business
-Raw Material Business
-Infrastructure Business
-Financial Business
-Insurance Business

Question 14

A type of business which provides intangible products (products with no physical form). Service type firms offer professional skills, expertise, advice, and other similar products.

Examples of service businesses are: salons, repair shops, schools, banks, accounting firms, and law firms

Answer 14

Service Business

Question 15

This type of business buys products at wholesale price and sells the same at retail price. They are known as “buy and sell” businesses. They make profit by selling the products at prices higher than their purchase
costs.

A merchandising business sells a product without changing its form. Examples are: grocery stores, convenience stores, distributors, and other resellers

Answer 15

Merchandising Business

Question 16

A type of
business where it buys products with the intention of using
them as materials in making a new product. Thus,
there is a transformation of the products purchased.

A business thst combines raw materials,
labor, and factory overhead in its production process.
The manufactured goods will then be sold to customers.

Answer 16

Manufacturing Business

Question 17

A type of business where are companies that may be
classified in more than one type of business. A restaurant, for example, combines ingredients in making a fine meal (manufacturing), sells a cold bottle of wine (merchandising), and fills customer orders (service).

Answer 17

Hybrid Business

Question 18

Those involved in the raw material supply business engage in the movement and storage of raw materials and unfinished goods from the point where they are generated to the point where they are used to produce a product or transformed into finished goods.

Answer 18

Raw Material Business

Question 19

the basic physical systems of a business or nation — transportation, communication, sewage, water and electric systems are all examples of
infrastructure. These systems tend to be high-cost investments and are vital to a country’s economic development and prosperity.

Answer 19

Infrastructure Business

Question 20

an establishment that conducts financial transactions such as investments, loans and
deposits.

Answer 20

Financial Business

Question 21

protects businesses from losses due to events that may occur during the normal course of business. There are many types of insurance for businesses including coverage for property damage, legal liability and employee-related risks.

Answer 21

Insurance Business

Question 22

Forms of Business
Organizations:

Answer 22

-Sole Proprietorship
-Partnership
-Corporation
-Cooperatives

Question 23

-Single individual
-Do not have separate legal existence from the owner

Advantages:
1. Ease of formation
2. The owner has full control of the business
3. Owners can mix personal and business assets
4. Owners have all the profits for themselves
5. Simple taxation

Disadvantages:
1. Unlimited liability
2. Difficulty of raising additional capital
3. Owner’s bias

Answer 23

Sole Proprietorship

Question 24

-Two or more persons are needed
-Money, property and industry are to be contributed
-Established for the purpose of obtaining profit
-Used by companies to generate profit by practice of profession

Answer 24

Partnership

Question 25

Other forms of partnership:

Answer 25

-Limited partnership
-Limited liability partnership
-Limited liability company

Question 26

General Features:
1. Separate legal existence
2. Limited liability
3. Transferable ownership rights
4. Virtually unlimited life
5. Corporation management
6. Government regulations
7. Double taxation
8. Dividends

Answer 26

Corporation

Question 27

A duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve a lawful common social or economic end, making equitable contributions to the capital required and accepting a fair share of the risks and benefits of undertaking in accordance with universally accepted cooperative principles.

Answer 27

Cooperatives