chapter 1 - 2 Flashcards
Types of Business Entities
Single proprietorship (sole trader): A form of business structure in which the business entity is owned by an individual
Partnership: A form of business structure under which a business entity is owned by two or more people as partners sharing profits and losses
Company (corporation): A form of business structure incorporated to operate as a business entity under the Corporations Act 2001 throughout Australia
Organisation
a group of people who share common goals with a well-defined division of labour
Efficiency:
maintaining a satisfactory relationship between an entity’s resource inputs and its outputs of products or services
Effectiveness:
a measure of how well an entity attains its goals
Management by exception
the concentration only on performance results that deviate significantly from those planned, as management time is a scarce resource
Performance report:
type of financial report issued periodically to inform management of any significant variations from expected results so action can be taken to improve efficiency or effectiveness of future operations, whenever possible
3 Primary Information Types
Financial Performance (income statement): the ability of an entity to utilise its assets efficiently and effectively to generate cash flows in the conduct of its activities, whether for profit or not for profit
Achievement of social and environmental goals should not be overlooked
Financial Position (balance sheet): the economic condition of a reporting entity, with regard to its control over economic resources, financial structure, capacity for adaptation, and liquidity and solvency
Operating activities (cash flows): activities associated with provision of an entity’s goods or services, and other activities that are neither financing nor investing activities
Business Activities
The ability of the entity to generate cash flow, focusing on three areas…
Operating Activities: the provision of and payment for goods and services
Investing Activities: activities associated with the acquisition and sale of an entity’s non-current assets, and with the purchasing and selling of investments that are not part of the definition of cash
Financing Activities: activities relating to the raising of funds for an entity to carry out it’s operating and investing activities, i.e. equity and borrowings that are not part of the definition of cash
Balance sheet (statement of financial position):
A financial statement reporting the financial position of an entity or division by listing the assets, liabilities and equity of a business entity as at a specific date
Represents accounting equation
Assets = Liabilities + Equity
Account Format
[Assets = Liabilities + Equity]
Narrative Format
[Assets – Liabilities = Equity]
Statement of cash flows
a financial statement that reports the cash flows in and out of an equity. The cash flows are classified into operating, investing and financing activities
Necessary to report on cash inflows and outflows of the entity
Income statement reports in income earned and expenses incurred but not on cash flows
Assess liquidity of firm
Allows users to assess sources and applications of cash
Allows the ability of the entity to remain solvent
Accounting entity assumption
Assumption that business entity is separate and distinct from its owners and from other business entities
Identify clearly the boundaries of the entity being accounted for
Personal transactions of the owner must remain separate from the transactions of the entity
Accrual basis assumption
Effects of transactions and events are recognised when they occur, not when cash is received/paid
Accounting is event driven process (receive or payment of cash irrelevant to earning profit)
If entity has provided service/sold goods, then income has been earned
Going concern assumption
Assumption that entity will continue to operate in future unless there is evidence to the contrary
There is a need to charge depreciation as business will outlive oldest assets
