Understanding businesses Flashcards
What are the two main purposes of businesses ? P3
- Make profit (common conception)
- Not for profit
What are the 6 standard types of organisations ? P3
- Sole trader
- Partnership
- Limited liability partnership & limited partnership
- Private limited company
- Public limited company
- not - for- profit organisation
What are sole trader businesses ? P3
- Individual - owns & runs
- ‘self employed
- limited capital & work alone
- Can employ
- Drawings then profit to business
What are the 6 key characteristics to remember about a sole trader ? P3
- Independence
- Profits to owner (post expense)
- easy legal set up - name / trading name
- unlimited liability - personal assets
- growth - own capital/ reinvesting profit/ borrowing
- long hours - stop holiday / illness
What are the two financial statements that are sole trader is concerned with? P4
- Profit/ loss
- statement of financial position
How often do financial statements for a sole trader need to be produced ? P4
- Annually
- end of financial year (not calendar)
- More often = info to sole trader
What is the format for financial statements of a sole trader, and the rules around governance ? P4
- No defined format
- No specific legislation governance
- No annual returns to Companies House
What is a sole trader responsible to the HMRC for ? P4
- Annual income tax returns - profit of business
- VAT registered - returns and payments
What is an unlimited liability partnership ? P4
- Number of individuals
- Share profit/ loss
- 2 and 20 partners (except large & professional business)
Why are unlimited liability partnerships bigger than sole traders ? P4
- More than one owner = more capital
- new business / logical growth (sole trader)
Where are the rules for an unlimited partnership set out ? P5
- Partnership Act 1890
- Partnership Agreement made ( written / oral)
What are the 7 key characteristics of an unlimited partnership ? P5
- Partner capital contribution = increasing acccess to Capital
- profits shared = terms of partnership agreement
- each partner liability- dealings and business debts whole business - not just share
- Longer decisions - other partners consulted
- individual specialist partners = areas of business
- cover for illness and holiday
- retirement / death = adverse effect
What financial statements does an unlimited partnership concern themselves with ? P5
- Profit/ loss
- Statement of financial position
What does the financial statements for an unlimited partnership show ? P5
- Shared profit/ loss - amoungst partners
- accounting rules - Partnership Act 1890/ Partnership agreemnent
What is the format for financial statements of an unlimited partnship ? P5
- None defined
- No specific legislation governance
- No governance BUT Partnership Act 1890 (sharing of profit/loss)
- No annual return - Companies house
What is an unlimited partnership responsible to the HMRC for? p5
- VAT registration - returns and payments
- Each partner - own annual income tax ( states profit share)
What will a partnership agreement usually cover ? P6
- Divsion of profits and losses
- Partners’ salaries / commission
- interests on Capital & interest rates
- interests & interests rates - drawings
What is goodwill in the context of a partnerhship ? P6
- Intangible asset
- strong and loyal customer base
- positive reputation
- highly skilled workforce
- successful and unique product
What is goodwill defined as in accounting terms and what is an example of this ? P6
- Difference - value of business and net value (separate assets and liabliities)
- existing business:
- business sold (800,000) - assets and liabilties (650,000) = goodwill (150,000)
What does goodwill require to be valued and when can this be done ? P6
- Negotiation
- partner retires
- new partner joins
What happens to goodwill once a partner retires ? P6
- Calculate amount due - capital and profits
- partnership agreement procedure
- goodwill valued & retiring partner paid
- insufficinet funds = capital loan due to retiring partner
What happens to goodwill when a new partner joins ? P6
- All partners agree
- buy in = premium for goodwill
- why:
- partner benefits - immediate profit & goodwill established
What happens following a change of partner in a partnership? P7
- Partnership agreement chnage
- update - new profit sharing ration
What is a limited liability partnership ? P7
- number of individuals
- separate legal entity
- personal liability limit
- LLP - preferred Professional partnerships - accounting , solicitors
- active partners
How is LLp set up ? P7
- Legal incorporation
- document submission = registrar of companies (companies house)
- advisable - members agreement - rights, duties , obligations of members
Who are those owning a LLP business referred to ? P7
- Members & not partners
- two or more
- legal & accounting requirements complete
- keeping accounting records , arranging account audits , confirmation statement & annual accounts to the companies house
who is the annual confirmation statement submitted by , to , and the reason for this ? P7
- LLP & Limited companies
- Companies House
- confirm submission Info required - Companies house act 2006
What financial statements are needed for LLP ? p7
- Profit / loss
- financial position
- supporting notes
- auditor’s report
What do the financial statements for LLP show ? P7
- How shared
- accounting rules - Limited Liability Partnership Agreement
What do the accounting requirements for financial statements of LLP include , and where is this set out ? P7
- Level of detail
- Order of items
- FRS (financial reporting standard) 102
- samples given
Where must the LLP’s confimration statement and annuual accounts be filed, and who is this done by ? P8
- Companies house
- Designated members
- Public inspection
What is a limited partnership in comparison to LLP ? P8
- Number of individuals
- incorporated - separate legal entity partnership
- limit personal liability
- difference - at leat one general & one limited
What would the general partner in a limited partnership do ? P8
- unlimited liability
- Day to day running
- limited partners = inactivity
- projects - short period
- investment for return share
What are limited companies and what are the two main limited companies ? P8
- Separate legal entity
- private
- public
What is a private limited company ? P8
- Own separate legal entity
- Shareholder owned
- Directors run
- share not on stock exchange
What is a public limited company ? p8
- Own separate legal entity
- Shareholder owned
- Director ran
- shares on stock exchange
When does a company become a public limited company ? P8
- > £50,000 issued shared capital
- least 2 members (shareholders)
- least 2 directors
How can the stocks of a PLC be dealt ? P8
- Traded on stock exchange
- Bought and sold by:
- individuals
- limited companies
- trusts
When may a company become private limited ? P8
- Privately owned
- no minimum - issued shared capital
- least one shareholder (member)
- least one director - can be shareholder
What does not having its shares on a stock exchange mean for a private limited company ? P8
- No public trading
- bought / sold privately
How do limited companies become incorporated ? P8
- Companies Act 2006 registration
- documents to Registrar of Companies - Companies house
Where are the rules for running a limited company set ? P8
- Articles of association
- agreement - shareholders, directors , and company seretary
- model Companies house - www.gov.uk
What is the role of a director in a limited company ? P9
- Runs company - behalf of shareholder
- annual confirmation statement and annual accounts - companies house
- Access to info -shareholders approval
What do the annual accounts of a limited company comprise of ? P9
- profit/loss
- statement of financial position
- supporting notes - financial statements
- director’s report - shareholders
- auditor’s report (smaller limited company poss exemption)
When complying a financial statement, what accounting rules do limited companies follow ? P9
- Accounting rules = Companies Act 2006 & Financial Reporting Stadndards ( international financial reporting standards )
- Samples - profit / loss & SOFP
- level of detail
- order of items
Where mus a limited company’s confirmation statement and annual accounts be filed, and who must do this ? P9
- Companies House
- Directors
- public inspection
What are the advantages of incorporation of a limited company ? P9
- members (LLP) and shareholder (LIMITED) liaibility limited - invested
- separate legal entity existence
- credibility enhancement
- easy access - finance
- easier transfer of ownership - sales of shares
What are the disadvantages of incorporation of a limited company ? P9
- Complex requirements setting up & record keeping , maintaing documentation , filing a annual return costs
- info @ companies house = public domain info (anyone can access)
- business finance not owner finance - no drawings
What are not-for-profit organisations ? P10
- Money received = achieve organisations objectives
- charities - charitable purposes
- public sector - public services to community
- motivation = not to make profit
What are the two main not-for-profit organisations ? P10
- Public sector
- Chairties
What is a public sector organisation ? P10
- Public services in UK - education , health , emergency services
- central/ local governemnt owned
- tax funded
- Private and public possible
- amount to spend = budget allocation
What is a charity set up to do ? P10
- Charitable activties - scope of charity
- income = funding, donations , grants
- expenditure = finance for activities
Where are the main rules governing a charity set out in ? P10
- Charities Act 2011
- Charity commission - regulator for most
- Statement of recommended practice (sorp)
- Accounting and reporting by Chartiies
- FRS (Financial Reporting Standard ) 102 - UK and Ireland
How are charities restrcited in what they do and how they work ? P11 - 6 points
- Charity law followed
- Public beenfit purpose
- trust deed governance - name , objects, powers , appointment of trustees , meetings , statements
- liable trustees - none benefit
- independent
- charity commission registration
What do financial statements for all but the smallest charities comprise of ? P11
- financial activities
- financial position
- cashflow
- support notes - financial statements
- trustees annual report
- auditor’s report (large)/ independent examiner’s report (medium sized)
What do the financial statements for charities comprise of, who must it be filed by, who must it be filed to, and who can view this ? P11
- Charity’s annual return
- Trustees
- Charity commission
- Public inspection
What are the common features that any type ofbusiness shares , regardless of type and structure? P11
- ROCS
- Responsibility, auhtority, and division of work - defined responsibilities (identify expectations + divides work) - varying authority
- co-operation - good working relationship & co-operatively
- common objectives & team working - defined objectives - goal congruence (goals of individuals = goals of business /shareholders )
- Structure - interrelated individuals - effectively & efficiently
What is a manufacturing business ? P12
- Makes and sell products
What does a servie business do ? P12
Provides service - customer, client , another business
Why is it easy for a manufacturing organisation to identify costs ? P12
- costs of making products to sell
- Material
- Labour
- Overheads
Why will a service organisation find it difficult to identify costs ? P12
- Saff time
- expertise
- overheads
- Not as defined
What are the main qualities differentiating a service business from a manufacturing business ? P12
- Intangibility - no physical product
- Inseparability - service = consumption (consumed=provided)
- Perishability - unsused service = no storage
- Variability - tailored = individual customer
What is the primary way for a business to invest in future growth ? P12
- Raise additional funds
- method of raising = type of organisation
How woudl a public sector organisation normally raise funds ? P12
Government funding
How would chairities and not-for-profit organisation raise funds ? P12
- fundraising
- donations
How would public and private limited companies raise funds for investment ? P12
- Owner
- long-term debt
What are the main ways a business can raise funds ? P12
- Borrowing
- New capital
- Retained profit
- Working capital
What is borrowing ? P12
- way of additional funds
- Bank loan
- repayment = amount + interests
What term is borrowed funding suitable for ? P13
- longer-term investment
- life of asset
- Not short term:
- pre-agreed overdraft - no high interests/ bank charges
How is new capital introduced to a business for limited companies ? P13
- Issuing further share capital:
- private company - existing shareholders / privately offered to new investor
- public limited company - stock exchange
How long is finance obtained through new capital suitable for ? P13
- Long term
- busiess growth
What is an advantage/ disadvantage of additional new capital funding ? P13
- disadvantage = dilution existing sharehold ownership
- Advantage = no interests
- advantage = repayment unrequired - later non invesmtnet
- shareholder - private sale , stock exchange
What is retained profit ? P13
- Alternative to dividends - reinvest in business
- shareholder agreement =less expensive business growth investment
Why would a shareholder opt for the business to retain its profit, rather than receiving dividends ? P13
- remain Profitable = future growth ( value of investment + potential higher future dividends)
What is working capital ? P13
- business current assets - current liabilities ( cash + investors + receivables- payables )
- circulates - bought and sold , payments made & receieved
- daily change
- sufficient funds importance - payables on time
What term of funding is working capital suitable for ? P14
- Short term funding
- VAT bill - staff bonuses
- sufficient working capital only - not day to day running unaffected
What is the definition of a stakeholder and what are the main stakeholders ? P14
- person/ organisation - interests - another organisation:
- customers
- suppliers
- finance providers
- owners / shareholders
- employees
What are the two main categories a stakehoder would fall into ? P14
- Internal stakeholders
- External stakeholders
- Various information needs
Why would the customer have an interests in the organisation ? P14
- NEEDS
- Good quality products and services - reasonable price
- price lists
- statements : amount owed
- Payment making details
* return - loyalty
- timely payment
Why wpuld suppliers have an interests in the organisation ? P14
- Need
- Trading continuity
- Timely payment - statements & invoices
return - good quality products
- reasonable price
Why would finance providers have an interests in an organisation ? P14
- Lend money
- prerequisite financial statements
- dealing finance departments- correct payments
Why would owner/ shareholders have an interests in an organisation ? P14
- Interests in profit business makes
- financial performance - annual reports
- private limited company = communication between directors & managers
- governemnt departtment interaction
- corporation tax, vat, income , and national insurance
Why would employees have an interests in the business ? P15
Need
* Info on performance = job security & pay
* necessary training
* opportunity to develop
return
* knowledge and skill in business
* loyalaty to stay
What body will affect the way in which a business operates ? P15
- Regulatory body
- legislation & regulation compilance
- e.g. manufacturing - health & safety regulations
What type of body may a business or individula working for a business be part of ? P15
- Professional body
- standards - rules and regulations
- UK travel agency - Association of british travel agent
- customer confidence
How will the general public expect a business to act ? P15
- Public interest
- safe and sustainable way
- positive contribution - local community
What is a stakeholder’s attitude to risk ? p15
- Level of risk - prepared to accept
- course of action - risk is too high
What is risk averse ? P15
- Avoid risk all costs = lower return
- higher price paid = minimise risk
What is a risk seeker ? P16
- Actively seek risk = likelihood of higher return
What is risk neutral ? P16
- Between risk averse and risk seeking
- some risk - no primary in decision
What are the three factors affecting the stakeholder’s willingness to accept risk ? P16
- Risk appetite - risk prepared to accept
- Risk tolerance - able to withstand
- Risk threshold - level up to which acceptable risk - monetary amount
What is a customer’s attitude to risk likely to be ? P92
- Averse
- Good quality & reliable products & services
- higher risk: siginificant discount
- higher risk : scarce goods - new untested supplier
What level is risk is a supplier likely to be ? P16
Averse
* reliable customer - will pay
What level of risk is a finance provider likely to be ? P16
- risk averse
- business lending to - affordable & timely repayments
What level of risk is an owner/ shareholder likely to accept ? P16
- desire - profittable business
- so receive dividends / investment gros
- so reasonable appetite - not over threshold
