Accounting for Decision Making

Question 1

What is the five-step decision making model?

Answer 1

1. Define/Identify the objective
2. Obtain relevant information
3. Generate feasible options/alternatives
4. Make a decision
5. Implement and evaluate

Question 2

How do you solve a system problem?

Answer 2

1. Find the point of deviation and establish what caused it

Question 3

What are the main types of oranisations?

Answer 3

1. Business - retail, service

2. Non-business - government, non-profit

Question 4

What is a business?

Answer 4

An entity or organization that engages in the trading of goods/services - most frequently established for profit

Question 5

What are the basic forms of business structures?

Answer 5

1. Sole Trader/Proprietorship
2. Partnership
3. Company

Question 6

What is a sole trader/proprietorship?

Answer 6

1. A business owned and operated by one person with full control over assets/decisions
2. Minimal regulations - no Act, no reporting requirements no extensive set up cost
3. Limited life, unlimited liability, limited funds

Question 7

What are the advantages of a sole trader?

Answer 7

1. Simple and inexpensive to establish and operate
2. Minimal financial reporting regulations
3. Financial rewards flow directly to the owner
4. Timely decision-making is possible

Question 8

What are the disadvantages of a sole trader?

Answer 8

1. Unlimited liability - bears full responsibility for business debts, any legal actions such as negligence
2. Limited by skill, time and investment of owner
3. Business will cease to exist if owner leaves, retires or dies

Question 9

A sole trader business:

a) is controlled and managed by an individual.
b) must prepare a tax return even though it is not a tax-paying entity.
c) is a tax-paying entity separate and distinct from its owner.
d) is classified as a separate legal entity.

Answer 9

a) is controlled and managed by an individual.

Question 10

A sole trader is an individual:

a) who is responsible for all debts.
b) taxed as an individual on the business income.
c) who has total control over the business.
d) all of the options listed.

Answer 10

d) all of the options listed.

Question 11

What is a partnership?

Answer 11

1. Two or more persons
2. formal agreement or informal arrangement
3. Limited life
4. Unlimited liability
5. Mutual agency - responsible for eachothers actions
6. Co-ownership of assets
7. Governed by Partnership Act

Question 12

What are the advantages of a partnership?

Answer 12

1. Simple to set up. An ABN must be applied for.
2. Informal business structure - not bound by accounting standards
3. Ability to share capital, skills, talents, knowledge and workload between two or more people
4. The partnership doesn’t pay income tax on the profit it earns - each partner reports their share of the partnership income in their own tax return. However, the partnership has to prepare an annual tax return.

Question 13

What are the disadvantages of a partnership?

Answer 13

1. Unlimited liability for business debts and obligations

2. Limited life - if a partner withdraws from the partnership, or if a partner dies, then the partnership must dissolve

Question 14

The withdrawal of a partner legally dissolves the partnership

a) True
b) False

Answer 14

a) True

Question 15

What is a company?

Answer 15

1. An independant legal entity
2. Owners are shareholders
3. Limited liability
4. Unlimited life
5. Assets are owned by the company
6. Profits belong to shareholders
7. Seperation of ownership and management
8. Extensive regulation

Question 16

What is the limit to liability

Answer 16

If your shares are fully paid, you have no liability If you are owing money on your share, your liability is the amount owing.

Question 17

What is the company regulation?

Answer 17

1. Legislation (Corporations Act 2001)

2. Organisations (ASIC, ASX, ACCC, RBA, APRA, ATO etc)

Question 18

What are the advantages of a company?

Answer 18

1. Perpetual existence
2. Owners (shareholders) have limited liability
3. Greater access to funds:
4. Potential taxation advantages - tax rate 30%. Top rate for individuals is much higher.

Question 19

What are the disadvantages of a company?

Answer 19

1. Higher establishment costs and time consuming to establish
2. Extensive regulation
3. Owners not able to watch everything (separation of ownership and management)
4. Limited liability aspect may cause problems, e.g. Banks lending to companies may require director’s personal guarantee

Question 20

Which of the following statements about companies is not true?

a. It must be dissolved when a partner dies or retires.
b. It is a separate tax-paying entity.
c. It can enter into contracts in its own name.
d. It can sue and be sued.

Answer 20

a. It must be dissolved when a partner dies or retires.

Question 21

Which of the following is not an advantage of the company form of business?

a. It has an unlimited life.
b. It has limited liability.
c. It has the ability to raise large amounts of capital.
d. It must comply with the Corporations Act 2001 and other legislation.

Answer 21

d. It must comply with the Corporations Act 2001 and other legislation.

Question 22

What are the types of companies?

Answer 22

1. Proprietary companies (Pty Ltd) - private, no more than 50 shareholders
2. Public Companies (Ltd)

Question 23

What are the types of Public Companies?

Answer 23

1. Limited by shares (offer shares to the public, at least 1 shareholder and 3 directors)
2. Limited by guarantee (owners guarantee to contribute specific amount in case of the company winding up)
3. No-liability company (NL) (not liable for amounts owed on shares)
4. Unlimited company (shareholders have no limit placed on their liability)

Question 24

Which of these is true for a public company?

a) It must have at least three directors and at least one shareholder.
b) It may be a no-liability company.
c) Shareholders may have unlimited liability.
d) All of the statements are true.

Answer 24

d) All of the statements are true.

Question 25

Private companies in Australia must have: a) at least one shareholder. b) at least two shareholders. c) at least three shareholders. d) more than fifty shareholders.

Answer 25

a) at least one shareholder.

Question 26

What is accounting?

Answer 26

The process of identifying, measuring and communicating relevant economic information (Business Transactions) about a particular business to a variety of users for making informed decisions.

Question 27

What are the components of accounting?

Answer 27

1. Analytical - identifying data 2. Technical - measuring data 3. Communication - implies information has value in decision making

Question 28

What are business transactions?

Answer 28

1. External exchange of something of value between two or more entities (one of which is the business firm). 2. They can be reliably measured and recorded 3. They affect assets, liabilities and equity (see topic 2)

Question 29

What is relevant information?

Answer 29

Information that makes a difference in decision making.

Question 30

Accounting information is designed to meet the needs of who?

Answer 30

1. Internal Users - Management (special purpose report) | 2. External Users - investors etc (general purpose report

Question 31

Accounting is divided into what two fields?

Answer 31

1. Financial Accounting | 2. Management Accounting

Question 32

What is Financial Accounting?

Answer 32

Preparing and presenting financial statements primarily for external parties. Statements are prepared in accordance with Generally Accepted Accounting Principles (GAAP)

Question 33

What is management accounting?

Answer 33

Preparing internal reports for management to assist decision making (e.g. budgets, production cost report, cost analysis) - Not regulated by rules like financial accounting

Question 34

What are the core activities in management accounting?

Answer 34

1. Formulating plans and budgets | 2. Providing information used in monitoring and controlling performance

Question 35

How is value created?

Answer 35

1. when resources in existing form (resources consumed) are transformed to another more valuable form (resources created). 2. Value added is the difference between resources created and resources consumed.

Question 36

1. 1 The proprietorship form of business organisation: a) must have at least two owners. b) means that the owner is personally liable for business debts. c) has an indefinite life. d) is characterised by a legal distinction between the business as an economic unit and the owner

Answer 36

b) means that the owner is personally liable for business debts.

Question 37

2. 1 The partnership form of business organisation: a) is a separate legal entity. b) is a common form of organisation for service-type businesses. c) has limited liability. d) all of the options listed.

Answer 37

b) is a common form of organisation for service-type businesses.

Question 38

2. 2 If the partnership agreement does not contain profit sharing arrangements, then the Partnership Act states that profits must be shared: a) according to the amount of time invested by each partner. b) in proportion to the capital contribution of each partner. c) equally between all partners. d) based on capital contributions and time invested

Answer 38

c) equally between all partners.

Question 39

3. 2 The business structures that protect the personal assets of the owners from the creditors of the business are: a) partnership. b) company. c) company and sole trader. d) partnership and company.

Answer 39

b) company.

Question 40

What are the 5 elements of a financial statement?

Answer 40

``` Assets Liabilities Equity Income Expenses ```

Question 41

What are the characteristics of an asset?

Answer 41

It must be owned or controlled by the entity It must result from a past exchange transaction or event It must be a present economic resource or a right that has the potential to benefit the entity.

Question 42

An asset may be either:

Answer 42

Tangible - assets with physical substance | Intangible - a non-monetary non-current asset without physical substance

Question 43

What are the two types of claims against a firm's assets?

Answer 43

External claims - owed to parties other than the owner | Internal claims - owed to the owner, made up of capital +/- profits, losses, withdrawals

Question 44

What are the characteristics for a liability?

Answer 44

A present obligation to another entity exists (i.e. the entity has no realistic alternative to settling the obligation). The present obligation arises as a result of past events. An outflow of resources embodying economic benefits is expected to flow from the entity as a result of settling the present obligation

Question 45

What is owners equity?

Answer 45

Equity represents claims of owner/s on the firm, and equals the firm’s net assets

Question 46

What items are included in Owners equity?

Answer 46

Capital contributed by owners Amounts paid to owners from profits Profits retained in the firm Reserves

Question 47

What four categories are expenses broken down into?

Answer 47

Cost of Sales (or cost of goods sold) Selling and distribution Administration Finance/Financial

Question 48

What is cash based accounting?

Answer 48

Records transactions related to income and expense only when cash is received and when cash is paid

Question 49

What is accrual-base accounting?

Answer 49

Transactions are recorded in the period to which they relate, rather than in the period the entity receives or pays the cash related to the transaction.

Question 50

What are the steps to analyze the effect of business transactions in the accounting equation?

Answer 50

Identify duality--at least 2 specific accounts, i.e. Identify the accounts involved (inventory? cash? accounts payable? etc.) Determine classification (i.e. Are the accounts A, L, OE, R, E?) Determine if accounts increase or decrease Determine amounts of increase/decrease for each account