Business Studies: Definition and Purpose
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Questions and Answers

Which of the following is an advantage of being a sole trader?

  • Owner is personally liable for all debts
  • Less stringent reporting obligations (correct)
  • Partners are entitled to profits and ownership of assets
  • Large sums of capital are easily available

    • What is a major disadvantage of being a sole trader?

  • May lead to short working hours with employee recreation leave
  • Owner is entitled to profits and ownership of assets
  • Owner is personally liable for all debts (correct)
  • Less stringent reporting obligations

    • What is a characteristic of a partnership?

  • Partnership is a separate legal entity from its owners
  • Partnerships are generally formed by contract (correct)
  • Partnership agreements are not legally binding
  • Partners are not entitled to profits and ownership of assets

    • What is a disadvantage of a partnership?

    <p>Partners are personally liable for all debts</p> Signup and view all the answers

    Why may sole traders rely on overdrafts and personal savings?

    <p>Because large sums of capital are less likely to be available</p> Signup and view all the answers

    What is the main purpose of a business?

    <p>To make a profit for its owners</p> Signup and view all the answers

    How many main types of business entities are there?

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

    What is an advantage of being a sole trader?

    <p>Owner has complete control over the business</p> Signup and view all the answers

    What may happen to a sole trader's business in the event of death or illness?

    <p>There may be issues of continuity of business</p> Signup and view all the answers

    What is a characteristic of a sole trader?

    <p>It is owned and run by one individual</p> Signup and view all the answers

    What is an advantage of being a sole trader?

    <p>It is ideal for businesses that do not require a great deal of outside capital</p> Signup and view all the answers

    What is the legislation that applies to partnerships in the UK?

    <p>Partnership Act 1890</p> Signup and view all the answers

    What is a sole trader legally responsible for?

    <p>The business they operate</p> Signup and view all the answers

    What must a sole trader maintain?

    <p>Financial records and produce financial accounts</p> Signup and view all the answers

    Why may banks request to see a sole trader's financial accounts?

    <p>When considering applications for loans and overdraft facilities</p> Signup and view all the answers

    What type of organisations are typical of sole trading?

    <p>Small local shops, hairdressers, plumbers and IT repair services</p> Signup and view all the answers

    Why do managers of a large public company need financial information?

    <p>To enable them to manage the business efficiently and make effective decisions</p> Signup and view all the answers

    What do shareholders of a company want to assess from financial information?

    <p>How well the company's management is performing</p> Signup and view all the answers

    Why do suppliers of a company want to know about its financial situation?

    <p>To assess the company's ability to pay its debts</p> Signup and view all the answers

    What do providers of finance to a company want to ensure?

    <p>The company's ability to keep up interest payments and repay loans</p> Signup and view all the answers

    Why do taxation authorities want to know about a company's profits?

    <p>To assess the tax payable by the company</p> Signup and view all the answers

    Who are the users of financial information that want to assess how well a company's management is performing?

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

    Who wants to know that a company is a secure source of supply and is in no danger of having to close down?

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

    What do trade contacts of a company want to know about its financial situation?

    <p>The company's ability to pay its debts and continue as a secure source of supply</p> Signup and view all the answers

    What is the total cash generated from operations?

    <p>$2,730m</p> Signup and view all the answers

    What is the purpose of corporate governance?

    <p>To direct and control companies and other entities</p> Signup and view all the answers

    What is the net cash flow from financing activities?

    <p>($790)m</p> Signup and view all the answers

    Who is responsible for the preparation of financial statements?

    <p>Those charged with governance</p> Signup and view all the answers

    What is the net increase in cash and cash equivalents?

    <p>$290m</p> Signup and view all the answers

    What is the total cash paid to suppliers and employees?

    <p>$27,600m</p> Signup and view all the answers

    What is the cash flow from operating activities?

    <p>$1,560m</p> Signup and view all the answers

    What is the total cash and cash equivalents at the end of the period?

    <p>$410m</p> Signup and view all the answers

    Why do employees of a company need information about the company's financial situation?

    <p>Because their future careers and wages depend on it</p> Signup and view all the answers

    Which stakeholders need information to advise investors?

    <p>Financial analysts and advisers</p> Signup and view all the answers

    Why do government agencies require information from business entities?

    <p>To provide a basis for national statistics</p> Signup and view all the answers

    What is one way in which entities may affect members of the public?

    <p>By providing employment and using local suppliers</p> Signup and view all the answers

    What may national laws require companies to provide?

    <p>Information for shareholders and the public</p> Signup and view all the answers

    What may a bank require from a company as a precondition of granting an overdraft?

    <p>A forecast of expected future cash flows</p> Signup and view all the answers

    What is the purpose of International Financial Reporting Standards (IFRSs)?

    <p>To require companies to publish certain additional information</p> Signup and view all the answers

    Who is responsible for issuing International Financial Reporting Standards (IFRSs)?

    <p>The IASB</p> Signup and view all the answers

    Study Notes

    Business Entities

    • A business is a commercial or industrial concern that exists to deal in the manufacture, resale, or supply of goods and services.
    • A business is an organization that uses economic resources to create goods or services that customers will buy.
    • A business is an organization that provides jobs for people.
    • A business invests money in resources (e.g., buildings, machinery, employees) to make more money for its owners.

    Types of Business Entities

    • Three main types of business entities:
      • Sole Trader
      • Partnership
      • Limited Liability Company

    Sole Trader

    • A sole trader is a business owned and run by one individual, perhaps employing one or two assistants.
    • The sole trader owns and runs the business, contributes the capital to start the enterprise, and earns the profits or stands the loss of the venture.
    • Typical sole trading organizations include small local shops, hairdressers, plumbers, and IT repair services.
    • In law, a sole trader is not legally separate from the business they operate.
    • The owner is legally responsible for the business.
    • A sole trader must maintain financial records and produce financial accounts, but there is no legal requirement to make these accounts publicly available.

    Advantages of Being a Sole Trader

    • Ideal for simple businesses that do not require a great deal of outside capital.
    • Advantages include:
      • Limited paperwork and cost in establishing the business structure.
      • The owner has complete control over the business.
      • The owner is entitled to profits and ownership of assets.
      • Less stringent reporting obligations compared to other business structures.
      • Can be highly flexible.

    Disadvantages of Being a Sole Trader

    • Disadvantages include:
      • Owner is personally liable for all debts (unlimited liability).
      • Personal property may be vulnerable for debts and other business liabilities.
      • Large sums of capital are less likely to be available to a sole trader.
      • May lead to long working hours without normal employee recreation leave and benefits.
      • May be issues of continuity of business in the event of death or illness of the owner.

    Partnership

    • A partnership occurs when two or more people decide to run a business together.
    • Examples include an accountancy practice, a medical practice, and a legal practice.
    • Partnerships are generally formed by contract.
    • Partnership agreements are legally binding and outline the proportionate amount of capital invested, allocation of profits, responsibilities, and procedures for dissolving the partnership.
    • Partnerships are not separate legal entities from their owners.

    Stakeholders' Needs

    • Various stakeholders interested in financial information about a company:
      • Managers of the company
      • Shareholders
      • Trade contacts (suppliers and customers)
      • Providers of finance (banks, loan providers)
      • Taxation authorities
      • Employees
      • Financial analysts and advisers
      • Government and their agencies
      • The public

    Financial Statements

    • Financial statements are prepared for the benefit of various user groups, including:
      • Management
      • Shareholders
      • National taxation authorities
      • Banks
      • IASB (International Financial Reporting Standards)
      • The public

    Example of a Statement of Cash Flows (Direct Method)

    • A statement of cash flows shows the inflows and outflows of cash and cash equivalents over a period.
    • The statement includes:
      • Cash flows from operating activities
      • Cash flows from investing activities
      • Cash flows from financing activities
      • Net increase in cash and cash equivalents

    Governance

    • Governance refers to the system by which companies and other entities are directed and controlled.
    • Those charged with governance of a company are responsible for the preparation of financial statements.

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    Description

    Learn about the definition and purpose of a business, including its role in manufacturing, resale, and supply of goods and services. Understand how businesses create goods and services, provide jobs, and invest resources to make a profit.

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