The Accounting Equation/ Business Ownership

Question 1

What are assets?

Answer 1

Present economic resources controlled by the entity that assist in operations to earn revenue

Examples include physical items such as vehicles and cash received electronically.

Question 2

How are assets created?

Answer 2

As a result of past events, such as purchase of items or contributions from the owner, that have the potential to produce economic benefits.

Question 3

What is a common example of an asset?

Answer 3

Cash to pay for rent

Assets are utilized to help the business in its operations.

Question 4

What are liabilities?

Answer 4

Present obligations of the entity that result from past events creating a debt to an outside entity.

Question 5

What does it mean when an entity has a liability?

Answer 5

It means there is an item owed to someone else, which will result in the transfer of economic resources.

Question 6

What is the formula for Owner’s equity?

Answer 6

Assets minus Liabilities

Owner’s equity reflects the residual interest in the assets of the entity after liabilities are deducted.

Question 7

How can profits affect Owner’s equity?

Answer 7

Profits can increase Owner’s equity, while drawings from the business can decrease it.

Question 8

What is the Accounting equation?

Answer 8

Assets = Liabilities + Owner’s Equity

This equation must always balance.

Question 9

What happens when a business owner contributes capital?

Answer 9

The Accounting equation reflects the increase in assets and Owner’s equity.

Question 10

What occurs when a business purchases a vehicle on credit?

Answer 10

Assets increase, liabilities increase, but the Accounting equation remains balanced.

Question 11

What does the Balance Sheet detail?

Answer 11

The firm’s financial position by listing its assets, liabilities, and owner’s equity at a specific point in time.

Question 12

What is the importance of classifying assets and liabilities as current or non-current?

Answer 12

It enhances the usefulness of the Balance Sheet and allows for the calculation of performance indicators.

Question 13

What do financial indicators assess?

Answer 13

They assess the firm’s profitability, liquidity, and stability.

Question 14

What does liquidity refer to?

Answer 14

The ability of a business to meet its short-term debts as they fall due.

Question 15

What is the Working Capital Ratio formula?

Answer 15

Current Assets / Current Liabilities

A ratio above 1:1 indicates the ability to meet short-term debts.

Question 16

What does a Working Capital Ratio of 1.6:1 represent?

Answer 16

The business has $1.60 of current assets to meet every $1 of current liabilities.

Question 17

What does stability refer to in a business context?

Answer 17

The ability of a business to meet its long-term obligations and remain a Going concern.

Question 18

What does the Debt Ratio measure?

Answer 18

The percentage of the firm’s assets funded by external sources, indicating financial risk.

Question 19

What is the Debt Ratio formula?

Answer 19

Total Liabilities / Total Assets x 100

A higher Debt Ratio indicates greater reliance on external funding.

Question 20

What can a Debt Ratio of 56% indicate?

Answer 20

The majority of assets are funded by external sources, which may create financial risk.

Question 21

Fill in the blank: The relationship between assets, liabilities, and owner’s equity is described by the _______.

Answer 21

Accounting equation

Question 22

True or False: Every transaction will change at least one item in the Accounting equation.

Answer 22

False

Question 23

What enhances understanding when classifying assets and liabilities?

Answer 23

The classification as current or non-current

This upholds the qualitative characteristic of understandability.

Question 25

What defines a small business?

Answer 25

Owned and managed by the same person, employs fewer than 20 people ## Footnote Small businesses represent roughly 97% of all private sector businesses in Australia.

Question 26

What are some reasons for becoming a small business owner?

Answer 26

* The profit motive * A desire for greater independence * The identification of a market opportunity * Employment * Expertise * Entrepreneurship * Determination * Confidence * Cordiality * Patience * Humility

Question 27

What are the three types of financial resources needed to establish a business?

Answer 27

* Internal Finance * External Finance * Professionals such as lawyers, accountants, and bankers

Question 28

What is the purpose of a business plan?

Answer 28

To outline essential information before operations commence, increasing chances of success ## Footnote A detailed business plan may help convince a financial institution to provide finance.

Question 29

What key components should a business plan include?

Answer 29

* Description of the business and chosen structure * Description of the product or service * Market analysis * SWOT analysis * Establishment costs * Sources of finance * Projected sales * Estimated running costs

Question 30

How can businesses be classified?

Answer 30

By the nature of their operations as trading, service, or manufacturing businesses.

Question 31

What are the three principal ownership structures?

Answer 31

* Sole proprietorships * Partnerships * Companies

Question 32

What are some consequences of choosing a specific ownership structure?

Answer 32

* Owner’s personal accountability for debts * Owner’s tax liability * Firm’s ability to raise capital * Costs of establishing the business * Compliance with government regulations * Ability to shut down/wind up business * Control over decision making

Question 33

What is a sole proprietorship?

Answer 33

A business owned by a single individual operating under their own name or a registered business name.

Question 34

List advantages of a sole proprietorship.

Answer 34

* Easy and cheap to set up * Owner has full control over decision making * Owner receives all profits

Question 35

List disadvantages of a sole proprietorship.

Answer 35

* Unlimited liability * Limited life of the business * Limited access to capital

Question 36

What is a partnership?

Answer 36

A business owned by 2 or more people operating under their own names with a view to make a profit.

Question 37

List advantages of a partnership.

Answer 37

* Relatively cheap to set up * Greater access to capital and skills * Control over decision making is shared * Simple to wind up

Question 38

List disadvantages of a partnership.

Answer 38

* Unlimited liability * Limited life of the partnership

Question 39

What is a proprietary company (Pty Ltd)?

Answer 39

A business that exists as a separate legal entity entitled to do business in its own right.

Question 40

List advantages of a proprietary company.

Answer 40

* Limited liability * Greater ability to attract capital * Life of the business is ongoing

Question 41

List disadvantages of a proprietary company.

Answer 41

* High establishment costs * Higher compliance costs * Separate tax returns required

Question 42

What is a public company (Ltd)?

Answer 42

A large business structure incorporated to publicly raise funds by selling shares.

Question 43

List advantages of a public company.

Answer 43

* Limited liability * Greater ability to attract capital * Life of the business is ongoing

Question 44

List disadvantages of a public company.

Answer 44

* High establishment and compliance costs * Needs to produce a prospectus to advertise for funds

Question 45

What are the options for acquiring a business?

Answer 45

* Start a new business * Buy an existing business * Buy a franchise

Question 46

What factors should be considered when acquiring a business?

Answer 46

* Start up costs * Ongoing costs * Goodwill * Access to a customer base * Control over decisions * Recognition * Buying power

Question 47

What characteristics do successful small businesses share?

Answer 47

* High demand for their product or service * Good location * Thorough business plan * Sufficient starting capital * Knowledgeable and resilient owner

Question 48

What factors contribute to small business failure?

Answer 48

* Competition * Poor location and online presence * Insufficient startup capital * Poor marketing strategies * Lack of skill and access to professional advice

Question 49

What are ethical considerations in business ownership?

Answer 49

* Impact on society and the environment * Treatment of employees * Sources of supplies * Treatment of customers * Contribution to societal wellbeing * Avoiding 'profits before people' culture

Question 50

What are alternative investment opportunities to business ownership?

Answer 50

* Property * Cash * Cryptocurrency * Shares

Question 51

What does Return on Owner’s Investment (ROI) measure?

Answer 51

The percentage of the amount invested returned to the owner in income or capital gains.

Question 52

What should investors consider regarding alternative investments?

Answer 52

* Correlation between risk and rate of return * Term * Liquidity * Ethical considerations