Chapter 1: Introduction to Business

Question 1

What is a service business?

Answer 1

A service business which provide services to its customer

Question 2

What is a trading business?

Answer 2

A trading business buys from suppliers and sells goods to customers

Question 3

SP: Ownership

Answer 3

It is owned by one person who contributes capital to set up the SP

Question 4

SP: Access to funds

Answer 4

It is less likely for banks and other lenders to lend money to the SP due to the lack of personal assets that can serve as collaterals. Hence, access to funds is usually limited to the personal funds of the owner.

Question 5

SP: Risk

Answer 5

When the SP incurs debts and losses, the sole owner is obliged to lay them using his or her personal asset

Question 6

SP: Level of control

Answer 6

The only owner usually runs the business by himself or herself and has absolute control over it

Question 7

SP: Lifespan

Answer 7

The SP exists as long as the owner is alive and desires to continue operation

Question 8

SP: Transferability of ownership

Answer 8

The sole owner can easily update the particulars of the new owner to notify the corporate regulatory authority of the transfer of ownership

Question 9

Stakeholders: Owners and manager

Answer 9

Need to make decisions on how to plan, control, monitor and operate the business

Question 10

Stakeholders: Employees

Answer 10

To evaluate their career prospects with the company

Question 11

Stakeholders: Investors

Answer 11

To evaluate if they should maintain, increase or decrease their investment. Potential investors decide if they should invest in the business

Question 12

Stakeholders: Bankers and lenders

Answer 12

To decide whether to grant the business credit or not.

Question 13

Stakeholders: Suppliers

Answer 13

To evaluate whether the business will be able to provide after-sale support

Question 14

Stakeholders: Government

Answer 14

To decide how much tax to collect from the business

Question 15

Stakeholders: Managers

Answer 15

To evaluate how the business is doing and how to improve the business performance

Question 16

Stakeholders: Competitors

Answer 16

Competitors may compare their performance against the business and decide how to improve their performance

Question 17

Role of accounting

Answer 17

Accounting is an information system that provides accounting information for stakeholders to make informed decisions regarding the management of resources and performance of business

Question 18

Role of accountant

Answer 18

Accountants prepare and provide accounting information for decision-making

Question 19

Professional Ethics

Answer 19

Integrity - Being straightforward and honest in all professional relationships
Objective - Will not let bias, conflict of interest or the undue influence of others override his or her professional judgment

Question 20

Accounting entity theory

Answer 20

The activities of a business are separate from the actions of the owner. All transactions are recorded from the point of view of the business

Question 21

Accounting period

Answer 21

The life of a business is divided into regular time intervals

Question 22

Accrual basis of accounting

Answer 22

Business activities that have occurred, regardless of whether cash is paid or received, should be recorded in the relevant accounting period

Question 23

Consistency

Answer 23

Once an accounting method is chosen, this method should be applied to all future accounting periods to enable meaningful comparison

Question 24

Going concern

Answer 24

A business is assumed to have an indefinite economic life unless there is credible evidence that it may close down

Question 25

Historical cost

Answer 25

Transactions should be recorded at their original cost

Question 26

Matching

Answer 26

Expenses incurred must be matched against income earned in the same period to determine the profit for that period

Question 27

Materiality

Answer 27

Relevant information should be reported in the financial statements if it is likely to make a difference to the decision-making process

Question 28

Monetary

Answer 28

Only business transactions that can be measured in monetary terms are recorded

Question 29

Objectivity

Answer 29

Accounting information recorded must be supported by reliable and verifiable evidence so that financial statements will be free from opinions and biases

Question 30

Prudence

Answer 30

The accounting treatment chosen should be the one that least overstates assets and profits and least understates liabilities and losses

Question 31

Revenge recognition

Answer 31

Revenue is earned when goods have been delivered or services have been provided