Chapter 1 - Understanding Businesss Flashcards

1
Q

Types of businesses

A

Sole trader, partnership, limited liability partnership, private limited company, public limited company and not for profit organisation.

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2
Q

Financial statements of a sole trader

A

Statement of profit or loss

Statement of financial position

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3
Q

Financial statements of a partnership

A

Statement of profit or loss

Statement of financial position

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4
Q

Goodwill

A

The amount by which the fair value of the net assets of the business exceeds the carrying amount of the net assets.

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5
Q

Limited liability partnerships

A

This is the often preferred business format for professional partnerships including accountants and solicitors.

It is advisable for an LLP to have a members agreement setting out the rights and obligations of members. In a LLP those who own the business are called members not partners. An LLP must have two or more designated members to make sure the the legal and accounting requirements are carried out.

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6
Q

Financial statements of a LLP

A

Statement of profit or loss

Statement of financial position

Supporting notes to the financial statements

Auditors report (smaller LLPs may be exempt from audit)

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7
Q

Limited partnerships

A

A limited partnership is similar to an LLP except that it must appoint at least one general partner and one limited partner. Like an LLP all limited partners will have limited liability, however, the general partners will have unlimited liability. The general partner is normally responsible for the day to day running of the business.

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8
Q

Limited companies

A

Main two types of limited companies:

Private limited companies

Public limited companies

A company may become a public limited company if it has:

More than £50,000 of issued share capital

At least two members

At least two directors

A private limited company is privately owned with:

No minimum requirement for issued share capital

At least one member

At least one director

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9
Q

Financial statements for limited company’s

A

Statement of profit or loss

Statement of financial position

Supporting notes to the financial statements

Directors report to shareholders

Auditors report

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10
Q

Advantages of incorporation

A

The liability for members and shareholders is limited to the amount they have invested

The continuing existence of the business as a separate entity

An enhancement of the credibility of the business

Access to finance may be easier

Transfer of ownership of the business may be easier

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11
Q

Disadvantages of incorporation

A

The main disadvantage is the more complex requirements of setting up the business and then the additional costs associated with record keeping and filing an annual return

Business finances must be kept separate from those of the owners which contrasts with a sole trader who can take drawings from the business as and when required

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12
Q

Not for profit organisations

A

Public sector - organisations in the public sector provide all public services in the uk. Some public sector organisations form partnerships with private sector companies to provide a service, eg hospitals in the nhs.

Charities - charities are set up to provide charitable activities within the scope of the charity. Most of their income is from donations, grants and funding and most of their expenditure is finance for their charitable activities

Charities are restricted in what they can do and they work:

They must follow charity law

Their purpose must be for public benefit

Most charities must register with the charity commission

They are run by trustees who do not usually benefit personally from the charity but could become liable for the debts of the charity

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13
Q

Financial statements for charities

A

Statement of financial activities

Statement of financial position

Cash flow statement

Supporting notes to the financial statements

Trustees annual report

Auditors report

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14
Q

Common features of business organisations

A

Structure

Common objectives and team working

Co-operation

Responsibility, authority and division of work

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15
Q

Manufacturing and service businesses

A

Manufacturing businesses are those organisations that actually make and sell products.

Service businesses are those organisation that provide a service to individual customers or clients or another business. This could be a firm of accountants or a cleaning company.

A manufacturing organisation will find it relatively easy to identify the cost of the products that it makes and sells. A service organisation will find this more difficult as the majority of its costs relate to staff time and expertise and overheads to run the business.

There are a number of qualities that differentiate a service business from a manufacturing business. This can be summarised as:

Intangibility - service does not provide a physical product

Inseparability - a service cannot be separated from its consumption by customers

Perishability - any unused service cannot be stored for future use

Variability - a service will be tailored to the needs of an individual customer

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16
Q

Funding sources

A

Borrowing

New capital

Retained profit

Working capital

17
Q

Business stakeholders

A

Customers

Suppliers

Finance providers

Owners or shareholders

Employees

18
Q

Stakeholders attitude to risk

A

This means the level of risk that stakeholders are prepared to accept and what they will do if they feel that the level of risk is unacceptably high.

Some stakeholders will try to avoid risk at all costs and will accept a lower return or pay higher prices if this will minimise the risk (risk averse).

Other stakeholders will actively seek out riskier options if this will increase the likelihood of a higher return (risk seeking).

There are also some that fall somewhere in the middle and are prepared to accept some risk and this will not be a prime factor in their decision making process (risk neutral).

19
Q

Factors affecting how much risk a stakeholder will accept

A

Risk appetite - level of risk they are prepared to accept to achieve their objectives

Risk tolerance - how much risk they are able to withstand

Risk threshold - the level up to which risk is acceptable, this could be quantified as an amount of money lost if a project fails

What the attitude of risk for stakeholders is likely to be:

Customers - likely to be risk adverse - they will want goods and services that they buy to be of good quality and for the supply to be reliable. However a customer might be willing to accept a higher level of risk if they were offered a significant discount.

Suppliers - likely to be risk adverse - they will only want to deal with reliable businesses that they are confident will pay for the goods that they order and receive.

Finance providers - risk adverse - before lending money they will want to ensure that the business they are lending to will be able to afford the repayments and they will be made on time.

Owners or shareholders - generally interested in maximising their investment. This means that they have a reasonable appetite for risk but will normally have a threshold above which they are not prepared to risk losing their investment.