(Week 2, Quiz 2) Business Structures
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Questions and Answers

What is a significant disadvantage of a sole proprietorship?

  • Limited access to funding
  • Formal partnership agreements
  • Unlimited liability (correct)
  • Increased establishment costs

    • A partnership can only be established through a formal written agreement.

    False

    What is one advantage of a sole proprietorship?

    Simple and inexpensive to establish

    In a partnership without a formal agreement, profits and losses are assumed to be shared __________ between the partners.

    <p>equally</p> Signup and view all the answers

    Match the terms with their descriptions:

    <p>Sole Proprietorship = Individual who controls and manages a business Unlimited Liability = Owner responsible for all business debts Partnership Agreement = Formal details outlining contributions and profit sharing Withdrawals = Resources taken out by a partner</p> Signup and view all the answers

    What is often limited in a sole proprietorship?

    <p>Access to funds</p> Signup and view all the answers

    Which characteristic of partnerships indicates that each partner is responsible for the actions of the other partners?

    <p>Mutual agency</p> Signup and view all the answers

    In a limited company, shareholders have unlimited liability for the company's debts.

    <p>False</p> Signup and view all the answers

    What is the role of corporate regulation in relation to company stakeholders?

    <p>To protect different stakeholders and promote a strong economy.</p> Signup and view all the answers

    A partnership has no separate legal entity, meaning there is no legal distinction between the business and the _____

    <p>partners</p> Signup and view all the answers

    Match the following characteristics with the correct type of business entity:

    <p>Unlimited liability = Partnership Separate legal entity = Limited Company Mutual agency = Partnership Limited liability = Limited Company</p> Signup and view all the answers

    Which of the following is NOT a disadvantage of companies?

    <p>Access to a wider market</p> Signup and view all the answers

    A 'small' proprietary company is required to prepare annual financial reports by default.

    <p>False</p> Signup and view all the answers

    One of the essential criteria for an asset is that it must be a present economic _____

    <p>resource</p> Signup and view all the answers

    Which of the following is an example of a current liability?

    <p>6-month bank loan</p> Signup and view all the answers

    Owner’s equity is the same as total assets.

    <p>False</p> Signup and view all the answers

    What is the definition of net income?

    <p>Net income is the increase in equity resulting from revenue generation after deducting expenses.</p> Signup and view all the answers

    Owner’s Equity can be calculated using the formula: Owner’s Equity = Assets - _____

    <p>Liabilities</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Current Liabilities = Obligations due within one year Non-current Liabilities = Obligations due after one year Income = Increases in assets or decreases in liabilities Expenses = Decreases in assets or increases in liabilities</p> Signup and view all the answers

    Which of the following is NOT a criterion for recognizing income?

    <p>Probable measurement uncertainty</p> Signup and view all the answers

    What must be established for an asset to be recognized?

    <p>Past event</p> Signup and view all the answers

    A future commitment to purchase an asset qualifies as a present obligation.

    <p>False</p> Signup and view all the answers

    What is the measure called when an asset or liability is included in financial reports?

    <p>Recognition</p> Signup and view all the answers

    An example of a current asset is __________.

    <p>inventory</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Recognised = Included in the financial reports Disclosed = Included as a note to the financial reports Current Assets = Items converted to cash within one year Non-current Assets = Items held longer than one year</p> Signup and view all the answers

    What is required for a liability to be recognized concerning relevance?

    <p>It must have a high probability of occurring</p> Signup and view all the answers

    The cost of an asset must always be uncertain for it to be faithfully represented.

    <p>False</p> Signup and view all the answers

    What is an example of a present obligation?

    <p>Bank loan</p> Signup and view all the answers

    A liability exists because of a __________ event that requires future transfer of resources.

    <p>past</p> Signup and view all the answers

    Which of the following is not a criterion for recognizing a liability?

    <p>Disclosed to stakeholders</p> Signup and view all the answers

    Study Notes

    Business Structures

    Sole Proprietorship

    • A sole proprietor manages their own business and is fully liable for all debts.
    • No separate legal entity exists; cannot enter into contracts independently.
    • Characterized by unlimited liability, where personal assets may be at risk.
    • Operates with minimum reporting regulations compared to other structures.
    • Limited access to funds as financial resources depend solely on the owner's personal assets.
    • Establishment costs are low; simple and inexpensive to set up.
    • Advantages include direct ownership rewards and streamlined decision-making.

    Partnerships

    • Formed by two or more individuals aiming for shared financial profit.
    • Can be established through formal agreements or inferred relationships.
    • Requires individual records of each partner's transactions.
    Partnership Characteristics
    • No separate legal entity; partners share liability for the partnership's debts.
    • Unlimited liability applies to each partner.
    • Mutual agency holds each partner responsible for others' actions.
    • Characterized by limited life; partnership changes with partner changes.
    • Assets and profits are collectively owned and shared according to agreements.
    • Limited to a maximum of twenty partners, with exceptions for some professions.

    Companies

    • Commonly referred to as 'limited companies', which exist as separate legal entities.
    • Ownership divided into shares held by shareholders who invest in the company.
    Company Characteristics
    • Distinct legal entity; capable of suing or being sued in its own right.
    • Unlimited lifespan; does not terminate with changes in ownership.
    • Limited liability means shareholders are only responsible for company debts up to their investment.
    • Company assets are owned independently by the company, not the shareholders.
    • Profits can be retained or distributed to shareholders.
    Advantages and Disadvantages
    • Greater access to funding and potential tax advantages.
    • Extensive regulatory requirements and higher establishment costs discourage some owners.
    • Owners face dilution of control and public scrutiny.

    Corporate Regulation

    • Protects stakeholders like investors, consumers, and lenders.
    • Governed by the Corporations Act, enforced by the Australian Securities and Investments Commission (ASIC).
    Additional Regulatory Bodies
    • Includes the Australian Securities Exchange (ASX), Australian Competition and Consumer Commission (ACCC), and others.

    Key Accounting Elements

    Assets

    • Must meet three criteria: present economic resource, control, and past event.
    • Economic resources provide potential future benefits, like cash flows or reduced liabilities.
    Asset Recognition Criteria
    • Cost must be justified relative to its benefits, ensuring relevance and faithful representation.
    • Current assets are manageable within one year; non-current assets are long-term holdings.

    Liabilities

    • Defined by the need to satisfy present obligations, transfer economic resources, and result from past events.
    Liability Recognition Criteria
    • Similar to assets, recognition relies on relevance of existence and faithfulness in representation.

    Owners' Equity

    • Formula: Owner’s Equity = Assets – Liabilities.
    • Reflects the net worth of the business after accounting for debts.

    Income (Revenue)

    • Involves increases in assets or decreases in liabilities.
    • Recognized when benefits exceed prior equity contributions.

    Expenses

    • Characterized by decreases in assets or increases in liabilities resulting in equity reduction.
    • Recognized based on the relevance of incurred expenses and their measurement reliability.### Conclusion
    • Mike's Inner City Cab Service recognizes a transaction as an expense if it meets the income definition and recognition criteria of the Conceptual Framework.

    Examples of Expenses

    • Common expenses include:
      • Salaries and Wages
      • Rent
      • Insurance
      • Advertising
      • Marketing
      • Interest
      • Depreciation
      • Income Tax
      • Administrative Costs

    Qualitative Characteristics of Financial Reports

    • Attributes of financial statement information that enhance its usefulness include:

    Fundamental Characteristics

    • Relevance: Influences users’ economic decisions through feedback or predictive value.
    • Faithful Representation (Reliability): Information must be complete, neutral, and free from error.

    Enhancing Characteristics

    • Comparability: Financial statements should allow for comparison over time and between entities.
    • Verifiability: Consistency in information should allow independent observers to reach consensus.
    • Timeliness: Information must be provided promptly to users.
    • Understandability: Information should be clear and understandable to users with reasonable business knowledge.

    Limitations of Accounting Information

    • Time Lag: Significant delays between the end of the financial year and the availability of financial reports.
    • Historical Information: Financial statements reflect past transactions, lacking forecast data.
    • Subjectivity of Information: Involves subjective decisions regarding the reporting of items and accounting policies under GAAP.
    • Information Costs: Financial statement preparation incurs costs related to gathering and summarizing data.
    • Release of Competitive Information: Financial reports may contain sensitive information that competitors could exploit.

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    Description

    This quiz focuses on the fundamentals of sole proprietorship as a business structure. It covers definitions, unlimited liability, and the limited life of a sole proprietor. Test your understanding of the unique characteristics and responsibilities involved in managing a sole proprietorship.

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