Exam Flashcards
What do all companies issue?
Ordinary shares
What is a sole trader
- Owned and operated by one person
- business and owner are one legal entity (business cannot enter contractual agreements, instead relying on the owner)
- limited life: change of owners
- unlimited liability: owner is responsible for obligations and debts
- limited access to funds
Advantages of sole trader
Control (ownership and management combined)
Simple and inexpensive to establish and operate
Profit does not have to be distributed among owners
No formal guidelines for financial report format
What are preference shares
Have preference over ordinary shares eg. Preference shareholders are first to receive dividends up to a maximum value. Higher priority in receiving dividends and/or in event of liquidation
- fixed rate of dividend
- not every company issues these
What is a partnership
Business owned and operated by two or more people
The business and owners are one legal entity (partners enter contractual agreements eg. Borrow, lend, sell)
Not bound by corporations act
Limited life: new partnerships commence when new partners are introduced
Mutual agency: partner responsible for other partner’s actions
Unlimited liability: each partner’s personal assets may be called upon to meet bad debts
Co- ownership of assets and profits
What are ordinary shareholders entitled to?
Undistributed profits and gains
One ordinary share carried one vote on issues affecting company such as voting for managing directirs
What are reserves
Represent ownership interests in assets. Amount set aside out of profits and surpluses which are not designed to meet any liability or commitment eg.
Capital profits reserve( profits made on sale of long term assets)
Dividend equalization reserve (constant dividends over time)
Capital redemption reserve (decision to redeem dividends)
Capital replacement reserve (decision to replace assets)
Revaluation reserve (increases in assets values to fair value due to inflation or other price changes)
If a company pays by cheque, where is this recorded?
Under accounts payable
Why may owner’s equity increase
When there is increase in profit showing an increase in owner’s stake in business
Why may owner’s equity decrease?
When the business makes a loss eg. Des not sell all of inventory
The owner’s stake in the business falls
Also when the owner makes drawings
What kind of acts have increase to regulate partners?
Jurisdictions across Australia have enacted partnership acts to regulate activities of partners in a partnership
When may regulations apply to small proprietary companies?
When requested by at least 5% of their shareholders or by ASIC
What is the directors’ report/ declaration according to corporation act?
A report made by the directors confirming their financial statements comply with relevant accounting standards and give a ‘true and fair’ depiction of the company’s financial performance and position
This is included in the annual report
Also at the declaration’s date whether the company can meet their liabilities as they fall due
what is the role if directors in a company
They are elected by the shareholders to manage the commonly for then.
Small company: board consists of 1 level management whom are all shareholders
Large: contains around 10 directors with thousands of shareholders
What is the role of accounting information
Assist with decision making
What is the role if external auditors
Must audit financial reports produced by companies to ensure the reports are fair, true and comply with statutory and accounting standards requirement
What is an auditor’s report?
Checks credibility and reliability of company’s financial reports in accordance with Australian Auditing Standards
Opinion section: whether the financial reports are a fair and true portrayal or company’s financial performance and position
What happens if the audit reveals the company’s financial statements are not a true reflection of their current performance and position?
In the auditor’s report under the opinion section, the auditor will state the report is ‘qualified’ and will give reasoning and evidence on how the company’s statements sway from their true position, performance, liquidity and accounting standards
What is an unqualified auditing report
When auditor states the business’s financial statements are a true reflection of their current performance and position
This gives assurance to company’s stakeholders in decision making
Do small proprietary companies need external auditors to audit their financial reports?
Usually no unless the ASIC stipulates then to do so
OR
At least 5% of shareholders just agree
Who uses the accounting report?
Accounting report is sent to shareholders and ASIC
Who may use accounting information?
Internal users: management board, managers, employees
External users: general public, potential investors, creditors, suppliers, customers, media and special interest group, government
What is financial accounting?
For external use
Must follow accounting standards
What is management accounting
For internal use
No accounting standards to follow