Module 1 - Introduction To Business Accounting

Question 1

Why would individual stakeholders (shareholders, banks, suppliers, employees, customers & government authorities) be interested in the accounting information of an organisation?

Answer 1

Shareholders: Information to determine the future profitability of the entity, to access the future cash flows for dividends & the possibility of capital growth of investments.

Banks: Information to determine whether the entity has the ability to repay a loan.

Suppliers: Information to determine an entity’s ability to repay debt associated with purchases.

Employees: Information concerning job security, the potential receive awards and bonuses, and promotional opportunities.

Consumers: Information regarding the continuity of the entity and the ability to provide goods and services.

Government Authorities: Information to determine the amount of tax that should be paid and any future tax liabilities.

Question 2

What do financial statements consist of?

Answer 2

Balance Sheet, Income Statement and Cash Flow Statement

Question 3

Which financial statement will give information on the business’ profitability?

Answer 3

Income Statement

Question 4

Which financial statement will give information on the debts of the business?

Answer 4

Balance Sheet

Question 5

Which financial statement will give information on what the business owns?

Answer 5

Balance Sheet

Question 6

Which financial statement will give information on the business’ operations?

Answer 6

Income Statement

Question 7

Difference between financial accounting and management accounting in terms of regulations.

Answer 7

FA - bound by accounting standards (eg.GAAP and IFRS) with lots of rules to meet
MA - much less formal and without any prescribed rules as the management accounting information are only reported to internal users

Question 8

Difference between financial accounting and management accounting in terms of timeliness.

Answer 8

FA- based on historical information, reports on the past operations of a business
MA- can be both a historical record and a projection of the future

Question 9

Difference between financial accounting and management accounting in terms of the level of detail.

Answer 9

FA- quantitative

MA- qualitative and quantitative

Question 10

Difference between financial accounting and management accounting in terms of the main users.

Answer 10

FA- internal and external users

MA- internal users

Question 11

What are the 3 basic forms of business structure?

Answer 11

Sole Trader
Partnership
Company

Question 12

Which business form(s) is not a separate legal entity; has a limited life? So the business will cease to exist if the entity wants to retire or passed away.

Answer 12

Sole Trader & Partnership

Question 13

Unlimited Liability - Owners are personally liable for all of the debts and legal actions of the business under which form(s)?

Answer 13

Sole Trader & Partnership

Question 14

Which business form(s) allows you to set up easily with no formal legal requirements and is easy to wind down as there is no need to deregister?

Answer 14

Sole Trader

Question 15

Why will a partnership dissolve if one partner dies?

Answer 15

A partnership does not have a separate legal entity

Question 16

In a partnership, why are your personal assets at possible risk if your partner makes a decision that incurs a large debt?

Answer 16

Partners are mutually responsible for the debt of the partnership. If one partner enters into a business transaction on behalf of the partnership, the other partner(s) will also be responsible for the transaction

Question 17

Which business form(s) are not required to file a set of financial statements to the companies office and is not required to file tax as it is the owner’s responsibility.

Answer 17

Sole Trader & Partnership

Question 18

Why do people still choose a Partnership despite the disadvantages (e.g. accountants and lawyers)?

Answer 18

1) Owners are able to draw on the resources and expertise of the co-partners compared to sole traders.
2) Profits are only taxed once (at the personal level of its owners) rather than twice, as corporations are taxed at the corporate level and then again at the personal level when dividends are distributed to the shareholders.
3) Flexibility. Because the owners of a partnership are usually its managers, especially in the case of a small business, the company is fairly easy to manage, and decisions can be made quickly without a lot of bureaucracy. This is not the case with corporations, which must have shareholders, directors, and officers, all of whom have some degree of responsibility for making major decisions.

Question 19

What does a separate legal identity ensure companies?

Answer 19

• The company can sue or be sued by others

- The company itself is liable for the debts of the business

Question 20

What does it mean for shareholders of a company to have limited liability?

Answer 20

The shareholder’s personal assets will not be at risk, they will only be liable for the contribution that they put in the business.

Question 21

Which business form(s) will not dissolve if the owner(s) die or change (will continue to operate)?

Answer 21

Company

Question 22

What are some disadvantages of starting up a company?

Answer 22

• More compliance compared to sole traders and partnerships
• Taxed from the first dollar they make and has to be taxed twice (first taxed by the company then by the individual owners by how much profit they make)

Question 23

What is the accounting entity concept?

Answer 23

Business transactions are reported separately from personal transactions involving owners, regardless of the forms of business entities.

Question 24

If the owner uses the business entity’s funds for personal use, how does it affect the balance sheet?

Answer 24

Show as a reduction to equity on the balance sheet (not an expense)

Question 25

Why would you want to keep the business and personal transactions separate?

Answer 25

• Tax purposes
• Business growth (if personal transactions are kept together with the business transactions, there wouldn’t be a clear overview of the business’ performance)

Question 26

What does it mean to buy a share in a company?

Answer 26

You will get a portion of the company in terms of ownership. E.g. the ownership rights will give you the voting right to say who you want on the BoD

Question 27

What are the two types of returns when you invest in a company?

Answer 27

1) Capital Gain

2) Dividends

Question 28

If you invest in a company, why are you not automatically able to claim dividends?

Answer 28

The company’s BoD decides whether they want to issue dividends or not

Question 29

What is the formula for market capitalisation?

Answer 29

[(Share Price) x (No. of Ordinary Shares)]

Question 30

What do we refer to when we want to know the worth of a company?

Answer 30

Market Capitalisation

Question 31

What do we refer to when we want to know the size of a company?

Answer 31

Markey Value