U2 AOS1 KK2 Financial Considerations Flashcards
What are 3 financial considerations that businesses need to think about when establishing a business?
- Bank accounts
- Financial control systems
- Record keeping strategies
True/False
Businesses with limited liability must have a separate bank account to the owners.
True. This is an ATO requirement.
True/False
Businesses with unlimited liability must have a separate bank account to the owners.
False.
However a separate bank account is recommended.
List 4 considerations when choosing a bank account.
- Fees - what fees does the bank charge to operate the account?
- Interest rate - What interest rate will the bank pay to your business on the funds in the business bank account?
- Proximity - How close/far away is the nearest branch?
- Merchant services - what merchant services does the bank offer (eg. eftpos facilities) and what are the associated costs.
What are financial control systems?
Tools used to oversee a business’ transactions and financial position.
Why are financial control systems important?
They help businesses to avoid large financial losses, raud, financial mismanagement and low cash flow.
What are five types of financial control systems?
- Budgeting
- Auditing
- Cash flow management
- Control of accounts receivable
- Inventory control
What is budgeting?
An estimation of revenue and expenses for a future time period that compiled and re-evaluated periodically.
What is auditing?
An examination or inspection of a business’ accounts by either an internal or external auditor, followed by physical checking of inventory to make sure all transactions are being recorded correctly. Undertaken to ascertain the accuracy of financial statements provided by the organisation (eg. income statement, statement of receipts and payments).
What is cash flow management?
The process of tracking how much money is coming into and out of the business. This helps the business owners/managers to predict how much money will be available to the business in the future. It also helps identify how much money the business needs to cover debts, like paying employees and suppliers
What does control of accounts receivable refer to?
The money that the business needs to collect from its customers, typically as a result of a credit sale.
A business needs to control its accounts receivable diligently to make sure it receives payment on time to avoid cash flow issues for the business through it having to pay suppliers before being paid by customers.
What is inventory control?
The process of ensuring that appropriate amounts of stock are maintained by a business, so as to be able to meet customer demand without delay while keeping the costs associated with holding stock and wastage to a minimum.
How does budgeting avoid large financial losses?
Estimating a businesses revenue and spending can allow for unnecessary expenses to be reduced before a financial loss occurs.
How does budgeting prevent fraud?
Identifies unexpected or irregular differences by comparing expected transactions with actual transactions.
How does budgeting avoid financial mismanagement?
Realistically sets out expected earnings and expenses. It also helps identify when and how much money can be spend to avoid unnecessary losses.
How does budgeting prevent low cash flow?
Predicts when cash flow may be low based on estimated sales and expenses for a specific period.
How does auditing avoid large financial losses?
By examining the accuracy of processes used to detect and prevent errors or fraud.
How does auditing prevent fraud?
By assessing the effectiveness of procedures used to detect and prevent fraud. For example, auditing checks that all customer transactions have been recorded and have receipts.
How does auditing avoid financial mismanagement?
By investigating whether current financial practices support the proper allocation of funds.
What are record keeping strategies?
Systems used to record and categorise transactions which then enables financial reports to be generated.
Record keeping can be done manually or electronically. List one example of each strategy.
Manual =
Cash book
Electronic =
MYOB, Xero, Quickbooks.
True or False
The ATO requires businesses to keep transaction records for 5 years.
True
True or False
Businesses do not have to keep a copy of original source documents provided that they have a record of the transaction in a cash book or electronic system such as MYOB.
False.
The ATO requires businesses to keep the original source document as well as a record of the transaction in a record keeping system.
True or False
All businesses must prepare the following financial statements on an annual basis:
*Income statement
*Balance sheet
*Statement of receipts and payments.
False
Only public companies and private companies with revenue > $10 million and 50 or more employees must prepare these financial statements annually.
True or False
Small companies, partnerships and sole trader businesses would benefit from preparing these financial statements (Income Statement, Balance Sheet, Statement of Receipts and Payments).
True
Identify the financial statement being described:
Shows the revenue generated from the sale of goods or services, minus the expenses incurred by the business.
Income Statement
Identify the financial statement being described:
Shows how much money the business owner would have left over (equity) if all assets were sold, and all outstanding debts paid.
Balance Sheet
Identify the financial statement being described:
Shows all cash flowing into the business from the sale of goods and services, less all cash flowing out of the business as a result of cash payments.
Statement of receipts and payments.
Choose which statement/s are correct:
a. Record keeping systems enable a business to accurately keep track of financial transactions.
b. Record keeping systems are a legal requirement. Transaction records provide evidence of transactions that needs to be reported when lodging tax returns.
c. Record keeping systems enable audits to be conducted (either by the business or by the ATO).
d. Record keeping systems enable a business to generate accurate financial reports
which provide a picture of how the business is performing and allow business owners and managers to make informed decisions about the running of their business.
All statements are correct.
