Sole trader

Question 1

what are the features of a sole trader business?

Answer 1

1- there is only one owner in this type of business
2- capital is introduced by the owner himself by
using his personal funds
3- all profits can be enjoyed by the owner himself,
no need to share
4- liability is unlimited
5- no separate legal existence

Question 2

what are the advantages of a sole trader business?

Answer 2

1- easy to set up as there are no legal requirements
2- owner has the sole control over the business
3- all profit can be enjoyed by owner himself
4- various business activities can be introduced to
the business without having to get permission
from the government

Question 3

what are the disadvantages of a sole trader business?

Answer 3

1- lack of capital to expand the business as there is
only one owner to raise capital
2- owners liability is unlimited
3- sole trader business is not considered a legal
entity
4- losses and risks of the business should be borne
by the owner himself
5- lack of skills, ideas, and more workload

Question 4

what is an income statement?

Answer 4

an income statement is a statement of all the revenues and costs of an organization for a specific period

Question 5

what is the statement of financial position?

Answer 5

statement of financial position is a statement of all the assets and liabilities of an organization at a specific date

Question 6

state one difference between an income statement and a statement of financial position

Answer 6

an income statement deals with revenues and costs while a statement of financial position deals with assets and liabilities.
an income statements covers a period of time whilst a statement of financial position is for a specified date

Question 7

what are the disadvantages of acquiring a bank loan to increase capital?

Answer 7

1- loan interest to pay every year
2- loan interest to pay irrespective of profits
3- loan to be repaid at given date

Question 8

suggest ways of raising long-term funds

Answer 8

1- introduce additional capital
2- take a partner
3- convert to a limited company
4- mortgage the premises
5- borror from family and friends
6- see if government grants are available

Question 9

what is a capital expenditure?

Answer 9

money spend on acquiring, improving and installing non current assets

Question 10

what is a capital receipt?

Answer 10

amounts received which do not form part of the day to day trading activities

Question 11

what is revenue expenditure?

Answer 11

money spend on the running of a business on day to day basis

Question 12

what is a revenue receipt?

Answer 12

amounts received in the day to day trading activities and other items of income

Question 13

what is the difference between capital and revenue expenditure?

Answer 13

capital expenditure is money spent on acquiring, improving and installing non-current assets while revenue expenditure is money spent on running a business on day to day basis
capital expenditure provides benefits for over one year while revenue expenditure provides benefits for less than one year
capital expenditure appears in the statement of financial position and revenue expenditure only appears in income statement

Question 14

explain the effect of a business income statement of recording capital expenditures as revenue expenditure?

Answer 14

expenses are overstated and profit for the year is understated

Question 15

what is the difference between capital and capital employed?

Answer 15

capital is the funds and resources introduced by the owner to the business
capital employed is the total of the owner’s capital and long term liabilities

Question 16

what is meant by working capital

Answer 16

working capital is the amount available for day to day running expenses. The difference between the current assets and current liabilities.

Question 17

state how working capital is calculated

Answer 17

Current assets minus current liabilities

Question 18

suggest possible problems a business may encounter if the working capital is inadequate

Answer 18

1- cannot meet debts when they fall due so that,
suppliers and loan providers will be reluctant
provide credit further.
2- cannot take advantage of cash discounts
3- cannot take advantage of business opportunities
as they arise
4- may have difficulty in obtaining further supplies
on credit/cannot replace inventory
5- cannot meet day to day expenses
6- may not be able to take cash drawings

Question 19

how to improve working capital of a business organization?

Answer 19

1- injection of capital
2- reduction in drawings
3- sale of surplus non-current assets
4- obtaining long term loans