Chapter 1 - Introduction To Business Financial Management

Question 1

What are the three different types of businesses?

Answer 1

The three different types of businesses are service, retailer and manufacture.

Question 2

What are the characteristics of a sole trader?

Answer 2

A sole trader is own by one person, not a seperate legal entity and the owner has unlimited liability.

Question 3

What are the advantages of being a sole trader?

Answer 3

The advantages of being a sole trader is making all the decisions, receiving all the profits and simple and cheaper to start business because there is less government requirements.

Question 4

What are the disadvantages of being a sole trader?

Answer 4

The disadvantages of being a sole trader is limited capital to start business, has unlimited liability and if the owner gets sick or goes on holiday, it is hard to find a replacement.

Question 5

What does unlimited liability mean?

Answer 5

Unlimited liability means if the business gets sued or goes into liquidation, the business must sell all its assets. But however, if the business’ assets aren’t enough to pay off liabilities, the business creditors have a claim on the owner’s personal assets such as house or car.

Question 6

What are the characteristics of a partnership business?

Answer 6

The characteristics of a partnership business is that it can be owned by 2-20 people, isn’t a seperate legal entity and the owners have unlimited liability.

Question 7

What are the advantages of being a partnership business?

Answer 7

The advantages of being a partnership business is more capital can be raised than a sole trader, there is shared ideas and expertise, division of work and limited rules and regulations.

Question 8

What are the disadvantages of being in a partnership?

Answer 8

The disadvantages of being in a partnership business is unlimited liability, profits shared, limited life and mutual agency.

Question 9

What are the characteristics of a proprietary company?

Answer 9

The characteristics of a proprietary company is it’s a seperate legal entity, they must have at least one shareholder but no more than fifty, they must have Pty Ltd Proprietary Limited in their name and the shareholders have limited liability meaning they only lose the money they invested.

Question 10

What are the advantages of having a proprietary company?

Answer 10

The advantages of having a proprietary company is seperate legal entity, limited liability, more capital available, easy transfer of ownership and continuous life.

Question 11

What are the disadvantages of having a proprietary company?

Answer 11

The disadvantages of having a proprietary company is that there are more laws, it is more expensive to start and if the company becomes large, there is more demanding in record keeping and reporting requirements.

Question 12

A small proprietary company must satisfy at least 2 of what 3 conditions?

Answer 12

A small proprietary company must satisfy at least 2 of the 3 conditions listed.
The annual sales is less than $25 million.
The assets at the end of the year is less than $12.5 million.
The company has less than 50 employees at the end of the year.

Question 13

What is the characteristics of a public company?

Answer 13

The characteristics of a public company is they must have at least one shareholder and there is no maximum and they must have Ltd Limited in their name.

Question 14

What are the advantages of a public company?

Answer 14

The advantages of a public company is limited liability, continuous life, greater capital base possible and easy to transfer interests.

Question 15

What are the disadvantages of a public company?

Answer 15

He disadvantages of a public company is it’s expensive to establish and maintain and there are on going government reporting and regulations.

Question 16

What is what the business owns is equal to?

Answer 16

What the business owns is equal to what it owes.

Question 17

What is the Accounting equation?

Answer 17

The Accounting equation is assets is equal to liabilities plus equity.
A = L + EQ

Question 18

What is the extended Accounting equation?

Answer 18

The extended Accounting equation is assets plus expenses is equal to liabilities plus equity plus income.
A + E = L + EQ + I

Question 19

Define asset.

Answer 19

An asset is a resource controlled by the entity as a result of past events and which future economic benefits are expected to flow to the entity.

Question 20

What is the criteria for asset recognition?

Answer 20

The criteria for asset recognition is it is probable that an inflow of future economic benefits will occur and the value of the asset can be measured reliably.

Question 21

Define liability.

Answer 21

A liability is a present obligation of the entity resulting from past events he settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Question 22

What is the recognition criteria for liabilities?

Answer 22

The recognition criteria for liabilities is it is probable that an outflow of future economic benefits will occur and the value of the liability can be measured reliably.

Question 23

Define equity.

Answer 23

Equity is the residual (remaining) interests in the assets of the entity after deducting all its liabilities.

Question 24

What are some short term sources of finance?

Answer 24

Some short term sources of finance are
Retained earnings (internal)
Bank overdraft (external)
Credit card (external)
Bills of exchange (external)
Trade credit (external)
Factoring of accounts receivable/debtors (external)

Question 25

What are some long term sources of finance?

Answer 25

Some long term sources of finance are
Additional capital
Retained earnings
Term loans
Mortgage loans
Leasing

Question 26

What are the advantages of using retained earnings and additional capital?

Answer 26

The advantages of using retained earnings and additional capital as a short term source of finance is the money doesn’t have to be paid back and no interest.

Question 27

What are the disadvantages of using retained earnings and additional capital?

Answer 27

The disadvantages of using retained earnings and additional capital as a short term of finance is the owner cannot withdraw the cash for his own use.

Question 28

What are the advantages of using a bank overdraft as a short term source of finance?

Answer 28

The advantages of using a bank overdraft as a short term of finance is that it’s fast and you can get more than the other sources of finance.

Question 29

What are the disadvantages of using a bank overdraft as a short term source of finance?

Answer 29

The disadvantages of using a bank overdraft as a short term source of finance is that the business’ bank account can’t constantly be in overdraft or the bank will stop giving the business money interest expense is quite high.

Question 30

What is trade credit?

Answer 30

Trade credit is a short term source of finance and is when a business purchases inventory on credit.

Question 31

What is bills of exchange?

Answer 31

Bills of exchange is a short term source of finance where a 180 days or less loan is given from a bank with the funds provided by an outside investor.

Question 32

What is factoring?

Answer 32

Factoring is a short term source of finance and is when a business sells its accounts receivable to a business for less than what it’s worth.

Question 33

What are credit cards?

Answer 33

Credit cards can be used as a short term source of finance and is where a bank pays for everything in a business and the business pays back the amount owing after not long.

Question 34

What are some financial institutions?

Answer 34

Some financial institutions are banks, finance companies, credit unions, insurance companies and superannuation funds and other money lenders such as cash converters.

Question 35

What is the rule about risk and return?

Answer 35

The rule about risk and return is making a small risk could result in a small return and making a large risk could result in a large return.

Question 36

What are some factors financial institutions consider before lending money?

Answer 36

Some factors financial institutions consider before lending money is collateral, liquidity, credit history, guarantors, interest rate and future business.

Question 37

What is collateral?

Answer 37

Collateral is a risk factor a financial institution considers before lending money.
Collateral means looking at assets that can be sold to the lender if the borrower fails to pay back the loan and any surplus from the sale of the asset is returned to the borrower.

Question 38

What are guarantors?

Answer 38

Guarantors is a risk factor financial institutions consider before lending a loan. Guarantors are people who say someone is likely to pay back a loan or they pay it back if the borrower can’t.

Question 39

What is history of the client?

Answer 39

History of the client is a risk factor financial institutions consider before they lend money to a borrower. A financial institution will look at credit history of the borrower before lending them money.

Question 40

What is liquidity?

Answer 40

Liquidity is a risk factor financial institutions consider before lending money to a borrower. Liquidity is the likeliness of the business to go into liquidation.

Question 41

What is return?

Answer 41

Return is a factor financial institutions discuss with their borrowers before lending them money. Financial institutions plan with their borrowers how they are going to pay back their loan and the future of the business.

Question 42

Define Accounting.

Answer 42

Accounting is defined as the process of providing decision makers with financial information to enable hem to make economic decisions about an entity.

Question 43

What is meant by the accrual accounting system?

Answer 43

Expenses are recognised when asset is decreased or a liability is increased.

Question 44

Describe the Accounting concept of entity.

Answer 44

Finances of the business are kept seperate from the owner.

Question 45

Describe the Accounting concept of double entry.

Answer 45

Every transaction must debit at least one account and credit at least one account.

Question 46

Describe the Accounting concept of the Accounting equation.

Answer 46

The equity of a business is equal to its assets less its liabilities.

Question 47

Describe the Accounting concept of monetary value.

Answer 47

All transactions are to be recorded with a monetary value.

Question 48

Describe the Accounting concept of historical cost.

Answer 48

The original cost of an asset upon purchase of it.