1102AFE Lecture 2: Accounting for Decision Making Week 2 Lecture Notes

56 views5 pages

harlequingnat161

30 May 2018

School

Department

Course

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

Accounting for Decision Making Week 2 Lecture Notes

Chapter 3

Overview- Business Structures

• The Basic forms of business structure are:

o Sole trader

o Partnership

o Company

o Trust (covered in your textbook)

• The three on which we focus (sole trader, partnership, company) have:

o Some things in common, and

o Area in which they are different

1.1

Areas common to all business structures

• All forms of businesses are a separate accounting entity i.e. separate from owner/s

of the usiess. This oept of sepaate etity is eessay fo usiess

transactions to be analyzed

• It is because the business and owner are separate entities that we can develop the

accounting equation

• Example: assumer, an owner invests capital (say $10,000 cash) to commence a

business. Fo the usiess’s pespetie:

o The business owns as Asset (cash) worth $10,000, we analyze this from the

point of view of the business

o The usiess oes the oe Oe’s euity ,

• All are governed by the general business requirements, e.g. relating to such issues

as:

o Paying wages

o Work cover requirements

o Business name registration

o License

o ATO requirements (including GST, BAS)

1.2

Areas of difference across structures

• These include issues such as:

o The extent of regulation

o Oe’s liaility i.e. hat is the oe’s legal esposiility?

o Equity structure

o Funding opportunities

o Decision making responsibilities

o Taxation

Sole Trader

• Minimal regulation:

o No Act governs sole traders

o No particular reporting requirements

o No extensive costs of set-up. Limited requirements (e.g. the general

registration requirements involve applying for an ABN)

find more resources at oneclass.com

Unlock document

This preview shows pages 1-2 of the document.
Unlock all 5 pages and 3 million more documents.

Already have an account? Log in

• NOT A SEPARATE LEGAL ENTITIY (as distinct from a separate accounting entity)

• Sole trader and partnership business DO NOT PAY TAX→ the owners of the business

pay tax

• Limited life (restricted to the period during which the owner continues to operate

the business)

• Unlimited liability (the owner is personally responsible for the debts and obligations

of the business)

• Limited access to funds (restricted to the personal resources of a single owner)

• Low establishment costs

Advantages of sole trader

• Simple and inexpensive to establish and operate

• Minimal financial reporting regulations

• Ownership and management are normally combines

• Financial rewards flow directly to the owner

• Timely decision-making is possible

Disadvantages of a sole trader

• Unlimited liability- bears full responsibility for business debts, any legal actions such

as negligence

• Limited by skill, time and investment of owner

• Restrictive structure due to non-legal status of the entity

• Business will cease to exist if owner leaves retires or dies

Partnership

• Two or more persons carrying on a business with a view to profit (therefore cannot

establish a non-profit organization as a partnership)

• Evidence of a partnership?

o Formal partnership agreement OR

o Informal arrangement between the parties OR

o Inferred by the actions of two or more individuals

• Not a separate legal entity

• Limited life. Dissolved on death or withdrawal of one of partners

• Unlimited liability

• Mutual agency (each partner is responsible for the actions of the other partners)

• Co-ownership of assets (the partnership assets are owed by the partners in

aggregate, not individually)

• Co-ownership of profits if the partnership has a written partnership agreement, it

can specify any profit-sharing arrangement they wish. If not, then the partnership

Act specifies that profits/ losses are shared equally

• Numbers limited- normally 20 is the maximum, but some exceptions exist e.g.

accounting practices

• While there is, no Act governing a sole trader, the Partnership Act 1891 (QLD) directs

the activities and rights and responsibilities of partners

Partnership agreements

find more resources at oneclass.com

Unlock document

This preview shows pages 1-2 of the document.
Unlock all 5 pages and 3 million more documents.

Already have an account? Log in

Document Summary

Accounting for decision making week 2 lecture notes. Areas common to all business structures: all forms of businesses are a separate accounting entity i. e. separate from owner/s of the (cid:271)usi(cid:374)ess. This (cid:272)o(cid:374)(cid:272)ept of (cid:862)sepa(cid:396)ate e(cid:374)tity(cid:863) is (cid:374)e(cid:272)essa(cid:396)y fo(cid:396) (cid:271)usi(cid:374)ess transactions to be analyzed. It is because the business and owner are separate entities that we can develop the accounting equation: example: assumer, an owner invests capital (say ,000 cash) to commence a business. Areas of difference across structures: these include issues such as, the extent of regulation, o(cid:449)(cid:374)e(cid:396)"s lia(cid:271)ility (cid:894)i. e. (cid:449)hat is the o(cid:449)(cid:374)e(cid:396)"s legal (cid:396)espo(cid:374)si(cid:271)ility? (cid:895, equity structure, funding opportunities, decision making responsibilities, taxation. Sole trader: minimal regulation, no act governs sole traders, no particular reporting requirements, no extensive costs of set-up. Advantages of sole trader: simple and inexpensive to establish and operate, minimal financial reporting regulations, ownership and management are normally combines, financial rewards flow directly to the owner, timely decision-making is possible.

Related Questions

Investment and financing decisions, which may beshort-term or long-term decisions are best describedas:

financial decision making.

economic decision making.

accounting decision making.

Mutual funds, pension funds, investment dealers andinsurance companies are best described as examples of:

corporate finance.

market intermediaries.

financial intermediaries.

Farmers and Merchants Bank lends money to Ruth topurchase a car from Steven Toyota. Ruth is going to insure the carwith Allstate Insurance. Which party is best described as thecreditor?

Ruth

Steven Toyota

Allstate Insurance

Farmers and Merchants Bank

Which of the following would not be described as adebenture?

An unsecured loan

A loan secured by collateral

A loan secured by the âfull faith and creditâ of theissuer

Morgan Stanley was the investment banking firm that tookFacebook from being a closely held company to issuing stock to thepublic for the first time. Which of the following terms mostclosely describes this?

money market security.

issuing commercial paper.

initial public offering (IPO).

debt security backed by the general credit of theissuer.

Which of the following transactions does not take placein the primary market? An investor:

buying a newly issued municipal bond.

buying shares of an initial publicoffering.

selling one hundred shares of stock through a stockbroker.

buying a U.S. Treasury bill through the governmentauction.

The majority of home purchases in the U.S. are securedwith a mortgage. A mortgage is:

an unsecured loan.

an equity investment in the property.

a debt obligation secured by a specificproperty.

Which form of business would most likely describe thefollowing, a college student other students, a retired woman whobabysits children, a teenager who mows lawns, and a partyclown?

Partnership

Corporation

Sole proprietorship

Limited liability company

Flow-through taxation is a characteristic for all butthe following forms of business?

Partnership

Corporation

Sole proprietorship

Limited liability company

Your sister wants to start a tee shirt business on e-Baywith you to help pay for college tuition. All of the following areadvantages to partnerships that you should both consider, except____________?

Easy to form

Access to capital

Business income is taxed once, at the individualpartnerâs level

Which of the following takes into account takes intoaccount the opportunity cost of funds?

Net profit

Economic profit

Accounting profit

When we talk about capital structure, this refersto:

the cash, inventory, and accountsreceivable.

mix of debt and equity to finance anenterprise.

the investment in plant, property andequipment.

The uncertainty associated with the use of debt tofinance a business enterprise is best described as:

financial risk.

business risk.

operating risk.

The mix of debt and equity that is used to finance abusiness enterprise is best described as theenterpriseâs:

assets.

working capital.

capital structure.

capital expenditures

Generally accepted accounting principles (GAAP) are bestdescribed as a(n):

organization that establishes the accounting principlesfor U.S. financial reporting.

accounting standards promulgated by the InternationalAccounting Standards Board (IASB.)

set of basic principles and conventions that are appliedin the preparation of financial statements.

organization that establishes the accounting principlesfor business entities in the European EconomicCommunity.

Which reporting convention requires recording revenueand expenses when the transaction occurs, regardless of when cashchanges hands?

Cost basis

Cash basis

Accrual basis

The summary of the companyâs performance over a periodof time, typically a fiscal quarter or fiscal year

Balance sheet

Statement of stockholderâs equity

Income statement

Statement of cash flows

_______ is the cash flow from the day-to-day operationsof the business; the result of subtracting the increase in newworking capital from traditional cash flow.

Cash flow from investing

Cash flow from financing

Simple cash flow

Cash flow from operations

The debt ratio is classified as which type ofratio?

Owner

Liquidity

Efficiency

Productivity

Financial Leverage

Inventory turnover, accountsreceivable turnover, fixed asset turnover, and total asset turnoverare all classified as which type of ratio?

Owner

Liquidity

Efficiency

Productivity

Financial Leverage

ABC Company attempts tomanage its earnings by extending the useful life of all of itsequipment. Which of the following will not be an outcome of thischoice by management?

Income will be higher than it would have been underprior accounting methods.

Equipment values will be higher than they would havebeen without the change.

Depreciation expense will be lower than it would havebeen under prior accounting methods.

Depreciation expense will be higher than it would havebeen under prior accounting methods.

It is important for a companyto know the level of sales at which it covers all its variable andfixed operating costs. This level of sales is best described asthe:

gross profit margin.

contribution margin.

operating break even.

operating profit margin.

The minimum return thatinvestors expect to earn on the investment in stock is bestdescribed as:

growth rate.

risk premium.

capital gains yield.

required rate of return

If a company returns more than the required rate ofreturn on a stock, what happens to the value of thatstock?

The stock price falls.

The stock price rises.

The stock price stays the same.

When market rates are greaterthan the dividend rate, preferred shares will tradeat:

par.

a discount.

a premium.

byzantiummoose662

QUESTION 1 The knowledge of financial accounting can assist people with decisions such as whether to extend credit to a business. True False 0.2 points Saved QUESTION 2 Employees of a company would not have a reason to use the information provided by financial accounting. True False 0.2 points Saved

QUESTION 3 Financial accounting should be used for assessing the financial health of large organizations only. True False 0.2 points Saved

QUESTION 4 Financial accounting can be helpful for a job candidate who is assessing the financial future of a potential employer. True False 0.2 points Saved QUESTION 5 Lenders might use the information produced by financial accounting when making loan decisions. True False 0.2 points Saved

QUESTION 6 Credit analysts prefer not to use information provided by financial accounting, as it is not accurate. True False 0.2 points Saved

QUESTION 7 Financial accounting is helpful to investment advisors. True False 0.2 points Saved

QUESTION 8 Financial accounting is more useful than managerial accounting. True False 0.2 points Saved

QUESTION 9 The decision to buy or rent equipment is an example of a decision aided by managerial accounting. True False 0.2 points Saved

QUESTION 10 Which of the following statements is true of financial accounting? A. It is used by external parties to make investment decisions. B. It is used to make lease or purchase decisions. C. Managerial accounting is another name for financial accounting, D. It is primarily used to make internal decisions of a business. E. The effectiveness of advertising can be judged using financial accounting. 0.2 points Saved QUESTION 11 The charge for using money over time, often associated with long-term loans, is known as: A. interest. B. principal. C. distribution charge. D. cash dividend. E. preferred dividend. 0.2 points Saved QUESTION 12 Which of the following is a common feature of financial and managerial accounting? A. Both have same objectives B. Both are prepared according to U.S. GAAP C. Both are reported at year end in the annual report D. Both are analyzed by external users while making investment decisions E. Both are used by the management in making decisions 0.2 points Saved

QUESTION 13 Dividends are required to be paid to stockholders on an annual basis. True False 0.2 points Saved

QUESTION 14 An individual who owns one or more shares of stock in a corporation is an owner of that corporation. True False 0.2 points Saved

QUESTION 15 Corporations do not exist as separate legal entities apart from their owners. True False 0.2 points Save Answer

QUESTION 16 It is very difficult to buy or sell ownership shares of a corporation in a stock exchange. True False 0.2 points Saved

QUESTION 17 Stock markets match up investors who wish to buy shares with those who wish to sell them. True False 0.2 points Saved

QUESTION 18 Legal process by which owners of an organization apply to a state government to have it identified as an entity legally separate from its owners is called: A. stocking. B. filling. C. attributing. D. registration. E. incorporation. 0.2 points Saved

QUESTION 19 An advantage of ownership in a sole proprietorship over ownership in a corporation is: A. tax benefits. B. having a board of directors. C. the ability to raise capital through issuance of stock. D. separation of owner and business as legal entities. E. limited liability for debts. 0.2 points Saved

QUESTION 20 Who hires the management of a corporation? A. Stockholders B. Board of directors C. Creditors D. Government E. SEC 0.2 points Saved QUESTION 21 Inventory refers to the: A. excess amount paid for an asset over its fair value. B. intangible assets of a business. C. merchandise bought or manufactured for the purpose of selling. D. amount of net income reinvested by company for future operations. E. revenue generated from investment. 0.2 points Saved QUESTION 22 Investors use financial information to predict whether a: A. company will recruit more employees. B. company's stock price will increase C. company has invested in buildings. D. company will pay salaries. E. company's bond price will increase. 0.2 points Saved

QUESTION 23 Financial accounting can be compared to a portrait. True False 0.2 points Saved

QUESTION 24 Financial statements provide the form and structure for the conveyance of financial information that will create a likeness of the reporting organization. True False 0.2 points Saved

QUESTION 25 The information reported in financial statements must be exact for an investor to make any decision. True False 0.2 points Saved

beigeant306

1102AFE Lecture 2: Accounting for Decision Making Week 2 Lecture Notes

Document Summary

Get access

Related Documents

1102AFE Lecture Notes - Lecture 2: Sole Proprietorship, Limited Liability, Legal Personality

1102AFE Lecture Notes - Lecture 3: Jb Hi-Fi, Trial Balance, Financial Statement

1102AFE Lecture Notes - Lecture 4: Share Capital, Accounting Period, Historical Cost

Related Questions