Unit 1, AOS 1 Flashcards
What is a small business
= any bus which the owner and manager are the same person employing fewer than 20 ppl
Characteristics of a small business
1) independently owned and operated
2) closely controlled by owner/manager who contributes most of the operating capital
3) the principal decision making is made by the owner/manager
Reasons for going into bus
1) profit motive
2) desire 4 greater freedom + independence
3) market opportunities (social + market needs)
Alternatives for going into business
- Cash
- Property
- Shares
-> from least to most risky
What are examples of external sources for businesses
- lawyers
- accountants
- human resource companies
- consultants
- bank managers
- assistance programs e.g gov.t programs
What are personal resources of business
- expertise
- entrepreneurship
- determination / resilience
- passion
- confidence
- cordiality + patience
- humility
Reasons for success or failure of businesses
- competition from other bus
- poor location
- insufficient start up capital
- poor marketing
- poor management skills + lack of willingness to seek advice = lack of humility
- poor customer relations
- poor info -> bad decisions
What is a sole trader business structure
an unincorporated bus owned and operated by a single owner which can employ up to 20 staff
What is a partnership business structure
an unincorporated bus owned and operated by 2-20 partners
What is a private limited company business structure
an incorporated bus owned by at least 1-50 selected shareholders, managed by a board of directors
What is a public limited company business structure
an incorporated bus that sells shares in an open market 2 an unlimited number of shareholders
What are accounting elements
= classification such as current assets, noncurrent assets, current liabilities, noncurrent liabilities, owners equity, revenue and expenses
What are accounting items
= specific examples of elements
What is an asset
= a present economic resource controlled by an entity as a result of past events
What is a current asset
= a present economic resource controlled by the entity that is expected to be converted to cash, sold or consumed within the next 12 months after the end of the reporting period
What is a noncurrent asset
= a present economic resource controlled by the entity that is not held for resale and is reasonably expected to be used for more than the next 12 months after the end of the reporting period
What is a liability
= a present obligation of an entity to transfer an economic resource as a result of past events
What is a current liability
= a present obligation of an entity expected to be settled with a transfer of an economic resource within the next 12 months after the end of the reporting period
What is a noncurrent liability
= a present obligation of an entity that aren’t expected to be settled with a transfer of an economic resource within the next 12 months after the end of the reporting period
What is owners equity
= residual value in assets of entity after deducting all its liabilities
What is revenue
= increase in assets or decrease in liabilities that -> increase in owners equity via net profit, other than those relating 2 contributions from the owner
What are expenses
= decrease in assets or increase in liabilities -> decrease in owners equity not considered drawings
What is the accounting equation
A = L + OE
Items of current assets
Bank
Accounts receivable
Inventory of supplies
Items of noncurrent assets
Equipment
Premises
Items of current liabilities
Accounts payable
Examples of noncurrent liabilities
Mortgage
Loan (over 12 months)
Items of revenue
Sales ( increase in assets)
Items of expense
Advertising
What are internal sources of finance: (Owners equity)
- Capital contribution = cash / other assets contributed 2 bus from owners personal assets
- Retained profits = net profit from past period x taken as drawings by owner
What are external sources of finance: Trade credit
= offered by some suppliers which allows c’er 2 purchase g/s + pay @ later date
What are external sources of finance: Bank overdraft
= provided by bank that allows account holder 2 withdraw more money than current balance or have -ve balance in account
What are external sources of finance: Term loan
Provided by banks + other lenders 4 specific purpose + repaid over time
What are external sources of finance: Mortgage
= loan secured against property
What are external sources of finance: Lease
= written agreement which grants 2 the leasee the right 2 use a particular asset 4 a specific period of time in return 4 periodic payments 2 the leasor
What is simple interest
= interest calculated as a % of original amount borrowed
PIT
Where P = principal (original amount borrowed), I = interest rate, T = time
What is a quote
a method of determining a selling price by estimating the costs involved with a particular job, and then adding on certain amount 2 provide for profit
What is the cost volume profit analysis
= tool that allows business to determine a selling price or volume of sales that will let them achieve a specific profit
Quantity to be sold =
(Total fixed cost + profits) /
(Selling price per unit - variable cost per week)
What is a contribution margin
= gross profit from the sale that goes towards covering total fixed costs and profits
What is the break even point
= the level of sales where total revenue equals the total expenses + the business makes neither a profit or loss
What are variable costs
= costs that vary directly in line with level of activity
What are fixed costs
= costs that don’t vary with the level of activity
What are the accounting assumptions
- accounting entity assumption
- going concern assumption
- period assumption
- accrual basis assumption
What is the accounting entity assumption
= records of assets, liabilities and business activities of the entity are kept completely separate from those of the owner of the entity as well as those of other entities
What is the going concern assumption
= bus. will continue operation in the future, and its records are kept on that basis
What is the period assumption
= reports are prepared 4 a particular period of results as a month or year, in order to obtain comparability of results
What is the accrual basis assumption
= revenues are recognised when earned and expenses are recognised when incurred, so profit is calculated as revenue earned in a particular period less expenses incurred in a period of time
What is the point of financial accounting
- 2 quantify items such as sales, expenses and profits
- 2 present the accounts in a meaningful way so as to measure the success of the business
- 2 provide info 2 the owner of the business + 2 other stakeholders
What is the accounting process
= source documents -> records -> reports -> advice
What is the traditional viewpoints of governments
= aim to max L.S of pop
achieved though-
- changing tax rates
- financing infrastructure
- transfer payments (welfare)
- subsidies
- rebates
What are material living standards
= refer 2 tangible things which improve our quality of life
What are non-material living standards
= refer 2 non-tangible aspects which impact our wellbeing
Ignore
Ignore
Advantages of term loans
- can purchase inc expensive asset
- flexible
- if secured, dec increase rate
Disadvantages of term loans
- Interest charged
- must be paid back in line with contractual terms
- Repayments can -vely impact cash flows
Strategies for improving debt ratio if high
- increase repayments
- seek a capital contribution from the owner 2 use in repaying a portion of debt
- Advertise 2 inc. cash flow generation through sales
Strategies for improving debt ratio if low
-> can be an indicator that bus can borrow more 2 fund planned bus expansion
How does debt ratio measure performance
-> D.R = measure of financial risk t/f higher ratio = higher risk which places greater pressure on cash flows when meeting payment of principal + interest
What are source documents
= documents that provide both the evidence that a transaction has occurred, and details of transaction itself
What are records
= sorting, classifying + summarising the info contained in source docs t/f inc. useable
What is reporting
= prep. of financial statements that communicate financial info 2 the owner
What is advice
= the provision 2 the owner by a range of options appropriate 2 their aims / objectives + recommendations as to their suitability
What are types of source documents and definitions
- Cash receipts = used 2 verify cash received
- EFTPOS = electronic funds transfer point of sale
- Credit card receipt = customer has paid using a credit card
- Bank statement (look @ notes)
- Sales invoice = used 2 verify sale of stock on credit
- Purchases invoice = used 2 verify purchase on credit
- Credit note = 4 a purchase + sales return
- Cheque butt = verify cash payment
- delivery docket = used 2 verify that goods received are goods ordered
- Shipping + order conformation = indicates an order has been dispatched + can be expected @ some point
- Memo = used 2 verify internal transactions
- Statement of account (look @ notes)
What is GST
= 10% tax levied by the fed. gov.t on g/s sales
-> collected by ATO
How would we classify GST if balance in a current asset
= GST receivable
How would we classify GST if balance is a current liability
= GST payable
What are the GST requirements
- “Tax invoice”
- name of seller
- ABN
- date of transaction
- description of g/s provided
- price of transaction including GST
- amount of GST
What is the single entry accounting system
= process of recording transactions in journals + then using summarised info 2 prep reports
What is a journal
= an accounting record that classifies + summarises transactions during a particular reporting period
What is a receipts journal
= an accounting record that classifies + summarises all cash received from other entities during a particular period
What is a cash payment journal
= an accounting record that classifies + summarises all cash paid 2 other entities during a particular reporting period
What is gst payable
= gst owed by the bus 2 ATO when amount of gst the bus has recieved on its fees is greater than the gst paid to suppliers
What is gst receivable
= gst owed 2 bus by the ATO when amount of gst the bus has paid 2 suppliers is greater than gst it has received on its fees
What is gst settlement
= payment made 2 ATO by small bus 2 settle GST payable
What is gst refund
= cash receipt from ATO 2 clear gst receivable
What is the gst formula
Opening balance of gst
+ gst received from customers
- gst paid 2 suppliers
+ gst refund ( 2 settle prev gst R)
- gst settlement ( 2 settle prev gst P)
= gst balance
-> +ve answer = gst payable
-> -ve answer = gst receivable
What are the 3 sections to a cash flow statement
- cash flows from operating activities = cash flows related 2 day 2 day trading activities
- cash flows from investing activities = cash flows related 2 purchase + sale of non-current assets
- cash flows from financing activities + cash flows related 2 changes in financial structure of firm
What is a cash flow statement
= an accounting report that reports all cash flows during a reporting period, classified as operating, investing or financing activities
Examples of cash flows from operating activities
- cash fees
- gst recieved + paid
- Interest received
- receipts from accounts payable
-wages - advertising
- interest expense
Examples of cash flows from investing activities
- cash proceeds from sale of nca
- cash purchase of an nca
Examples of cash flows from financing activities
- capital contribution
- loan received
- drawings
- loan repayments
What is a cash surplus
= cash receipts > cash payments -> higher bank balance
what is a cash deficit
Cash receipts < cash payments -> lower bank balance
what is the difference b/n a cash deficit and a bank overdraft
- deficit = reduction in bank balance h/r not necessarily -ve balance
Occurs when C.R < C.P - overdraft = -ve balance, it describes x a change but a level of cash
p.o.d = what it describes
What is a cash flow cover (cfc)
= a liquidity indicator that asses the firms ability of the bus operating cash flows to meet it’s short term debts as they fall due
CFC = (net cash flows form op) / (average current liabilities)
What is a trend
= a pattern formed over time
Strategies to improve cash flow cover
- improve cash flows through greater advertising 2 increase sales
- negotiate with bank 2 extend repayment periods on existing loans
- organise a bank overdraft facility with bank b/c chance -ve balance might occer in s.t
strategies when cash flow cover is too high
- use excess cash 2 fund expansion of bus
- use excess cash 2 decrease debt by paying down loans
- use excess cash 2 invest upgrades 2 equipment 2 improve operations
What are internal control mechanisms
= procedures + strategies used 2 protect firm’s assets from theft, damage + misuse
Types of internal control mechanisms
- physical safeguards
- preventative safe guards
- separation of duties
- rotation of duties
- careful hiring practices
- effective employee training
What is the bank reconciliation process
step 1+ 2 = compare cash receipts -> check bank column of cash R journal against credit column of B.S
Compare cash P journal against debit column pf B.S
Step 3 = update cash R+P journals
step 4 = prepare BRS
What is direct credit
= cash deposited directly into bus bank account
What is direct debit
= cash withdrawn directly from bus bank account
Different types of cash control
look in notes (too may too write)
