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Business awareness > Understanding businesses > Flashcards

Understanding businesses Flashcards

1
Q

What are the two main purposes of businesses ? P3

A
  • Make profit (common conception)
  • Not for profit
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2
Q

What are the 6 standard types of organisations ? P3

A
  1. Sole trader
  2. Partnership
  3. Limited liability partnership & limited partnership
  4. Private limited company
  5. Public limited company
  6. not - for- profit organisation
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3
Q

What are sole trader businesses ? P3

A
  • Individual - owns & runs
  • ‘self employed
  • limited capital & work alone
  • Can employ
  • Drawings then profit to business
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4
Q

What are the 6 key characteristics to remember about a sole trader ? P3

A
  • 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
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5
Q

What are the two financial statements that are sole trader is concerned with? P4

A
  • Profit/ loss
  • statement of financial position
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6
Q

How often do financial statements for a sole trader need to be produced ? P4

A
  • Annually
  • end of financial year (not calendar)
  • More often = info to sole trader
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7
Q

What is the format for financial statements of a sole trader, and the rules around governance ? P4

A
  • No defined format
  • No specific legislation governance
  • No annual returns to Companies House
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8
Q

What is a sole trader responsible to the HMRC for ? P4

A
  • Annual income tax returns - profit of business
  • VAT registered - returns and payments
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9
Q

What is an unlimited liability partnership ? P4

A
  • Number of individuals
  • Share profit/ loss
  • 2 and 20 partners (except large & professional business)
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10
Q

Why are unlimited liability partnerships bigger than sole traders ? P4

A
  • More than one owner = more capital
  • new business / logical growth (sole trader)
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11
Q

Where are the rules for an unlimited partnership set out ? P5

A
  • Partnership Act 1890
  • Partnership Agreement made ( written / oral)
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12
Q

What are the 7 key characteristics of an unlimited partnership ? P5

A
  • 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
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13
Q

What financial statements does an unlimited partnership concern themselves with ? P5

A
  • Profit/ loss
  • Statement of financial position
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14
Q

What does the financial statements for an unlimited partnership show ? P5

A
  • Shared profit/ loss - amoungst partners
  • accounting rules - Partnership Act 1890/ Partnership agreemnent
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15
Q

What is the format for financial statements of an unlimited partnship ? P5

A
  • None defined
  • No specific legislation governance
  • No governance BUT Partnership Act 1890 (sharing of profit/loss)
  • No annual return - Companies house
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16
Q

What is an unlimited partnership responsible to the HMRC for? p5

A
  • VAT registration - returns and payments
  • Each partner - own annual income tax ( states profit share)
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17
Q

What will a partnership agreement usually cover ? P6

A
  • Divsion of profits and losses
  • Partners’ salaries / commission
  • interests on Capital & interest rates
  • interests & interests rates - drawings
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18
Q

What is goodwill in the context of a partnerhship ? P6

A
  • Intangible asset
  • strong and loyal customer base
  • positive reputation
  • highly skilled workforce
  • successful and unique product
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19
Q

What is goodwill defined as in accounting terms and what is an example of this ? P6

A
  • 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)
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20
Q

What does goodwill require to be valued and when can this be done ? P6

A
  • Negotiation
  • partner retires
  • new partner joins
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21
Q

What happens to goodwill once a partner retires ? P6

A
  • Calculate amount due - capital and profits
  • partnership agreement procedure
  • goodwill valued & retiring partner paid
  • insufficinet funds = capital loan due to retiring partner
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22
Q

What happens to goodwill when a new partner joins ? P6

A
  • All partners agree
  • buy in = premium for goodwill
  • why:
  • partner benefits - immediate profit & goodwill established
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23
Q

What happens following a change of partner in a partnership? P7

A
  • Partnership agreement chnage
  • update - new profit sharing ration
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24
Q

What is a limited liability partnership ? P7

A
  • number of individuals
  • separate legal entity
  • personal liability limit
  • LLP - preferred Professional partnerships - accounting , solicitors
  • active partners
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25
Q

How is LLp set up ? P7

A
  • Legal incorporation
  • document submission = registrar of companies (companies house)
  • advisable - members agreement - rights, duties , obligations of members
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26
Q

Who are those owning a LLP business referred to ? P7

A
  • Members & not partners
  • two or more
  • legal & accounting requirements complete
  • keeping accounting records , arranging account audits , confirmation statement & annual accounts to the companies house
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27
Q

who is the annual confirmation statement submitted by , to , and the reason for this ? P7

A
  • LLP & Limited companies
  • Companies House
  • confirm submission Info required - Companies house act 2006
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28
Q

What financial statements are needed for LLP ? p7

A
  • Profit / loss
  • financial position
  • supporting notes
  • auditor’s report
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29
Q

What do the financial statements for LLP show ? P7

A
  • How shared
  • accounting rules - Limited Liability Partnership Agreement
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30
Q

What do the accounting requirements for financial statements of LLP include , and where is this set out ? P7

A
  • Level of detail
  • Order of items
  • FRS (financial reporting standard) 102
  • samples given
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31
Q

Where must the LLP’s confimration statement and annuual accounts be filed, and who is this done by ? P8

A
  • Companies house
  • Designated members
  • Public inspection
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32
Q

What is a limited partnership in comparison to LLP ? P8

A
  • Number of individuals
  • incorporated - separate legal entity partnership
  • limit personal liability
  • difference - at leat one general & one limited
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33
Q

What would the general partner in a limited partnership do ? P8

A
  • unlimited liability
  • Day to day running
  • limited partners = inactivity
  • projects - short period
  • investment for return share
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34
Q

What are limited companies and what are the two main limited companies ? P8

A
  • Separate legal entity
  • private
  • public
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35
Q

What is a private limited company ? P8

A
  • Own separate legal entity
  • Shareholder owned
  • Directors run
  • share not on stock exchange
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36
Q

What is a public limited company ? p8

A
  • Own separate legal entity
  • Shareholder owned
  • Director ran
  • shares on stock exchange
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37
Q

When does a company become a public limited company ? P8

A
  • > £50,000 issued shared capital
  • least 2 members (shareholders)
  • least 2 directors
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38
Q

How can the stocks of a PLC be dealt ? P8

A
  • Traded on stock exchange
  • Bought and sold by:
  • individuals
  • limited companies
  • trusts
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39
Q

When may a company become private limited ? P8

A
  • Privately owned
  • no minimum - issued shared capital
  • least one shareholder (member)
  • least one director - can be shareholder
40
Q

What does not having its shares on a stock exchange mean for a private limited company ? P8

A
  • No public trading
  • bought / sold privately
41
Q

How do limited companies become incorporated ? P8

A
  • Companies Act 2006 registration
  • documents to Registrar of Companies - Companies house
42
Q

Where are the rules for running a limited company set ? P8

A
  • Articles of association
  • agreement - shareholders, directors , and company seretary
  • model Companies house - www.gov.uk
43
Q

What is the role of a director in a limited company ? P9

A
  • Runs company - behalf of shareholder
  • annual confirmation statement and annual accounts - companies house
  • Access to info -shareholders approval
44
Q

What do the annual accounts of a limited company comprise of ? P9

A
  • profit/loss
  • statement of financial position
  • supporting notes - financial statements
  • director’s report - shareholders
  • auditor’s report (smaller limited company poss exemption)
45
Q

When complying a financial statement, what accounting rules do limited companies follow ? P9

A
  • Accounting rules = Companies Act 2006 & Financial Reporting Stadndards ( international financial reporting standards )
  • Samples - profit / loss & SOFP
  • level of detail
  • order of items
46
Q

Where mus a limited company’s confirmation statement and annual accounts be filed, and who must do this ? P9

A
  • Companies House
  • Directors
  • public inspection
47
Q

What are the advantages of incorporation of a limited company ? P9

A
  • members (LLP) and shareholder (LIMITED) liaibility limited - invested
  • separate legal entity existence
  • credibility enhancement
  • easy access - finance
  • easier transfer of ownership - sales of shares
48
Q

What are the disadvantages of incorporation of a limited company ? P9

A
  • 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
49
Q

What are not-for-profit organisations ? P10

A
  • Money received = achieve organisations objectives
  • charities - charitable purposes
  • public sector - public services to community
  • motivation = not to make profit
50
Q

What are the two main not-for-profit organisations ? P10

A
  • Public sector
  • Chairties
51
Q

What is a public sector organisation ? P10

A
  • Public services in UK - education , health , emergency services
  • central/ local governemnt owned
  • tax funded
  • Private and public possible
  • amount to spend = budget allocation
52
Q

What is a charity set up to do ? P10

A
  • Charitable activties - scope of charity
  • income = funding, donations , grants
  • expenditure = finance for activities
53
Q

Where are the main rules governing a charity set out in ? P10

A
  • 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
54
Q

How are charities restrcited in what they do and how they work ? P11 - 6 points

A
  • 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
55
Q

What do financial statements for all but the smallest charities comprise of ? P11

A
  • financial activities
  • financial position
  • cashflow
  • support notes - financial statements
  • trustees annual report
  • auditor’s report (large)/ independent examiner’s report (medium sized)
56
Q

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

A
  • Charity’s annual return
  • Trustees
  • Charity commission
  • Public inspection
57
Q

What are the common features that any type ofbusiness shares , regardless of type and structure? P11

A
  • 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
58
Q

What is a manufacturing business ? P12

A
  • Makes and sell products
59
Q

What does a servie business do ? P12

A

Provides service - customer, client , another business

60
Q

Why is it easy for a manufacturing organisation to identify costs ? P12

A
  • costs of making products to sell
  • Material
  • Labour
  • Overheads
61
Q

Why will a service organisation find it difficult to identify costs ? P12

A
  • Saff time
  • expertise
  • overheads
  • Not as defined
62
Q

What are the main qualities differentiating a service business from a manufacturing business ? P12

A
  • Intangibility - no physical product
  • Inseparability - service = consumption (consumed=provided)
  • Perishability - unsused service = no storage
  • Variability - tailored = individual customer
63
Q

What is the primary way for a business to invest in future growth ? P12

A
  • Raise additional funds
  • method of raising = type of organisation
64
Q

How woudl a public sector organisation normally raise funds ? P12

A

Government funding

65
Q

How would chairities and not-for-profit organisation raise funds ? P12

A
  • fundraising
  • donations
66
Q

How would public and private limited companies raise funds for investment ? P12

A
  • Owner
  • long-term debt
67
Q

What are the main ways a business can raise funds ? P12

A
  • Borrowing
  • New capital
  • Retained profit
  • Working capital
68
Q

What is borrowing ? P12

A
  • way of additional funds
  • Bank loan
  • repayment = amount + interests
69
Q

What term is borrowed funding suitable for ? P13

A
  • longer-term investment
  • life of asset
  • Not short term:
  • pre-agreed overdraft - no high interests/ bank charges
70
Q

How is new capital introduced to a business for limited companies ? P13

A
  • Issuing further share capital:
  • private company - existing shareholders / privately offered to new investor
  • public limited company - stock exchange
71
Q

How long is finance obtained through new capital suitable for ? P13

A
  • Long term
  • busiess growth
72
Q

What is an advantage/ disadvantage of additional new capital funding ? P13

A
  • disadvantage = dilution existing sharehold ownership
  • Advantage = no interests
  • advantage = repayment unrequired - later non invesmtnet
  • shareholder - private sale , stock exchange
73
Q

What is retained profit ? P13

A
  • Alternative to dividends - reinvest in business
  • shareholder agreement =less expensive business growth investment
74
Q

Why would a shareholder opt for the business to retain its profit, rather than receiving dividends ? P13

A
  • Profitable
  • future growth award = value of investment + potential higher future dividends
75
Q

What is working capital ? P13

A
  • business current assets - current liabilities ( cash + investors + receivables- payables )
  • circulates - bought and sold , payments made & receieved
  • daily change
  • sufficient funds importance
76
Q

What term of funding is working capital suitable for ? P14

A
  • Short term funding
  • VAT bill - staff bonuses
  • sufficient working capital only - not day to day running unaffected
77
Q

What is the definition of a stakeholder and what are the main stakeholders ? P14

A
  • person/ organisation - interests - another organisation:
  • customers
  • suppliers
  • finance providers
  • owners / shareholders
  • employees
78
Q

What are the two main categories a stakehoder would fall into ? P14

A
  • Internal stakeholders
  • External stakeholders
  • Various information needs
79
Q

Why would the customer have an interests in the organisation ? P14

A
  • NEEDS
  • Good quality products and services - reasonable price
  • price lists
  • statements : amount owed
  • Payment making details
    * return
  • loyalty
  • timely payment
80
Q

Why wpuld suppliers have an interests in the organisation ? P14

A
  • Need
  • Trading continuity
  • Timely payment - statements & invoices
    return
  • good quality products
  • reasonable price
81
Q

Why would finance providers have an interests in an organisation ? P14

A
  • Lend money
  • prerequisite financial statements
  • dealing finance departments- correct payments
82
Q

Why would owner/ shareholders have an interests in an organisation ? P14

A
  • 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
83
Q

Why would employees have an interests in the business ? P15

A

Need
* Info on performance = job security & pay
* necessary training
* opportunity to develop
return
* knowledge and skill in business
* loyalaty to stay

84
Q

What will affect the way in which a business operates ? P15

A
  • Regulatory body
  • legislation & regulation compilance
  • e.g. manufacturing - health & safety regulations
85
Q

What type of body may a business or individula working for a business be part of ? P15

A
  • Professional body
  • standards - rules and regulations
  • UK travel agency - Association of british travel agent
  • customer confidence
86
Q

How will the general public expect a business to act ? P15

A
  • Public interest
  • safe and sustainable way
  • positive contribution - local community
87
Q

What is a stakeholder’s attitude to risk ? p15

A
  • Level of risk - prepared to accept
  • course of action - risk is too high
88
Q

What is risk averse ? P15

A
  • Avoid risk all costs = lower return
  • higher price paid = minimise risk
89
Q

What is a risk seeker ? P16

A
  • Actively seek risk = likelihood of higher return
90
Q

What is risk neutral ? P16

A
  • Between risk averse and risk seeking
  • some risk - no primary in decision
91
Q

What are the three factors affecting the stakeholder’s willingness to accept risk ? P16

A
  • Risk appetite - risk prepared to accept
  • Risk tolerance - able to withstand
  • Risk threshold - level up to which acceptable risk - monetary amount
92
Q

What is a customer’s attitude to risk likely to be ? P92

A
  • Averse
  • Good quality & reliable products & services
  • higher risk: siginificant discount
  • higher risk : scarce goods - new untested supplier
93
Q

What level is risk is a supplier likely to be ? P16

A

Averse
* reliable customer - will pay

94
Q

What level of risk is a finance provider likely to be ? P16

A
  • risk averse
  • business lending to - affordable & timely repayments
95
Q

What level of risk is an owner/ shareholder likely to accept ? P16

A
  • desire - profittable business
  • so receive dividends / investment gros
  • so reasonable appetite - not over threshold

Business awareness (2 decks)

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