Chapter 2 - Types of Business Entity Flashcards Preview

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Flashcards in Chapter 2 - Types of Business Entity Deck (31)
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1
Q

What are the main types of business entity?

A
  1. Sole Trader
  2. Partnership
  3. Limited Liability Company
2
Q

What are four ways in which we can look at or consider a business?

A
  1. Commercial or industrial concern - exists to deal in the manufacture, resale or supply of goods and services
  2. Organisation which uses economic resources to create goods or services which customers will buy
  3. organisation providing jobs for people
  4. Invests its money in resources (buildings, machinery, employees) in order to make even more money for its owners.
3
Q

Define Profit

A

the excess of revenue (income) over expenditure. when expenditure exceeds revenue the business is making a loss

4
Q

Define a manufacturing entity

A

An entity which buys raw materials and uses them to produce finished good which it then sells to customers.

5
Q

What is a retail entity?

A

One which buys goods and then sells them to customers. No work is done to the goods. eg. IK or Walmart

6
Q

What are the five characteristics of a retail entity?

A
  1. typically operate from a location where selling takes place (or if online then a warehouse where the goods are)
  2. Hold large amounts of goods for resale to meet customers needs.
  3. The cost of goods sold in P&L tends to be high given the amount of goods purchased.
  4. Have large amounts of trade payables as they will try to buy their goods on credit.
  5. Have low amounts of trade receivables as most sales will be for cash or card rather than on credit.
7
Q

True or false. The cost of goods figure for a retail entities P&L tends to be low given the amount of goods purchased.

A

False. That would mean they have a high markup. rather they have a low markup on many items.

8
Q

What is a service entity?

A

a business which provides a service to its customers. eg individual cleaning windows to doctor or accountant.

9
Q

What are the main characteristics of a service entity? (5)

A
  1. Main asset = employees which cannot be represented as a monetary value and is not included on the finances
  2. Wages and salary = large portion of expenses in the P&L
  3. Only a small level of goods kept on premises. Only things like stationery.
  4. Trade payables are low as few goods are being purchased.
  5. May have large amounts of trade receivables if services are provided on credit.
10
Q

What is a sole trader? give examples

A

A type of business entity comprised of an individual who works for themselves. eg. shopkeeper, plumber etc.
The term sole trader refers to the ownership of the business. can have employees

11
Q

True or false. a sole trader can have employees

A

True

12
Q

What is a partnership?

A

When two or more people decide to run a business together. eg. medical practice, legal practice etc

13
Q

What is a limited liability company

A

Incorporated to take advantage of ‘limited liability’. while sole traders and partnerships are personally responsible for the accounts owned by their business, the shareholders of a company are only responsible for the amount paid for their shares.

14
Q

How are sole traders, partnerships, and companies viewed in the eyes of the law?

A

sole traders and partnerships are not separate entities from their owners, companies are and can issue contracts from their name.

15
Q

What are the 5 advantages of trading as a limited liability company?

A
  1. investment less risky.
  2. easier to raise finance as there can be many shareholders
  3. separate legal identity from shareholders
  4. Taxed as a separate entity. can be lower than the rate for the individual
  5. easy to transfer shares from one owner to another.
16
Q

What happens when one of the partners changes in a partnership?

A

the partnership ceases to exist and a whole new one is set up

17
Q

What are the 4 disadvantages of trading as a limited liability company?

A
  1. Have to publish annual financials statements. anyone can see how good or bad you are doing.
  2. Statements have to comply with legal and accounting requirements.
  3. Larger companies have to be audited. inconvenient time consuming and expensive.
  4. Share issues are regulated by law. difficult to change capital.
18
Q

In which structure is it easiest to increase or decrease capital: A. sole trader B. company

A

Sole trader

19
Q

What are the 3 advantages of trading as a partnership vs sole trader?

A
  1. Risks are shared between partners
  2. Each partner is a source of funding, greater access to capital.
  3. Individual partners strengths and specialisation create a wider skill base.
20
Q

What are the disadvantages of trading as a partnership vs a sole trader?

A
  1. There may be disputes between partners

2. Partners are jointly liable for debts of partnership

21
Q

Who are the 9 users of financial information with regards to large companies?

A
  1. Managers of company
  2. Shareholders
  3. Trade contacts
  4. Providers of finance to the company
  5. Tax authorities
  6. Employees
  7. Financial analysts and advisers
  8. Government
  9. The public
22
Q

Why do managers of a company need financial statements?

A

To properly supervise the day to day comings and goings of the company and to make informed decisions about the future of the company

23
Q

Why do shareholders of a company need financial statements?

A

To assess how well the company is performing. to know the profits to expect.

24
Q

Why do trade contacts of a company need financial statements?

A

The ability of the company to pay its debts and security that the company is not at risk of liquidation.

25
Q

Why do providers of finance to a company need financial statements?

A

Banks, for example, want to know the company can pay its interest and repay its loans.

26
Q

Why do tax authorities of a company need financial statements?

A

Want to be able to assess the tax payable by the company

27
Q

Why do employees of a company need financial statements?

A

To be able to assess their job and wage security

28
Q

Why do financial analysts/advisers of a company need financial statements?

A

information for clients and audience. eg. stockbrokers need info to advise investors.

29
Q

Why do government agencies need a companies financial statements?

A

Interested in the resource allocation and activity of business entities. Also info for national statistics

30
Q

Why does the public need a companies financial statements?

A

To know the economic and environmental contributions that company has.

31
Q

Who are the most important users of financial information?

A

Existing and potential investors and lenders