Free WACE Year 11 Accounting and Finance Flashcard Review
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What makes a source of finance a debt source rather than equity?
It is provided by an outside party, must be repaid and usually carries interest or fees, so it creates a liability rather than increasing owner's equity.
Name four short-term sources of debt finance.
Bank overdraft, trade credit, business credit card and debtor (invoice) finance.
Name four long-term sources of debt finance.
Term loan, mortgage loan, lease and chattel mortgage or hire purchase (equipment finance).
Why is an overdraft suited to short-term cash gaps?
It is flexible and interest is charged only on the amount overdrawn for the days it is used.
What is the main disadvantage of an overdraft?
A variable interest rate plus fees, including a line fee charged on the whole limit even when it is not used.
When does trade credit have a cost?
When the supplier offers a discount for early payment that the business forgoes by paying later, or when late payment attracts penalties.
Give one advantage and one disadvantage of leasing.
Advantage: little up-front cash is needed. Disadvantage: the business does not own the asset, and lease payments, fees and charges can end up costing more than buying it outright.
What is the matching idea in choosing finance?
The term of the finance should broadly match the useful life of the asset or need being funded.
List the eight factors lenders consider.
Risk, collateral, liquidity, history, guarantors, return, interest rate and future business.
How does a guarantor help a borrower?
The guarantor promises to repay if the borrower defaults, which lowers the lender's risk and can make approval more likely.
Why does collateral usually lower the interest rate?
The lender can sell the pledged asset on default, so its risk is lower and it needs less compensation.
What does 'future business' mean as a lending factor?
The lender considers the value of an ongoing relationship, such as the borrower later using its accounts, merchant services and further loans.
How many owners can a sole trader, partnership and small proprietary company have?
Sole trader: one. Partnership: two or more, usually up to 20. Small proprietary company: one to 50 non-employee shareholders.
Which forms of ownership have unlimited liability?
Sole traders and partnerships. Partners are also jointly liable for all the partnership's debts.
What is the liability of a shareholder in a Pty Ltd company?
Limited to any amount unpaid on the shares they hold.
How are partnership profits shared if there is no agreement in WA?
Equally between the partners, under the Partnership Act 1895 (WA).
How are company profits distributed to owners?
As dividends to shareholders, when and as the directors decide, usually per share held (subject to the terms of the shares).
Which forms are separate legal entities?
Only the company. All three are separate accounting entities.
What is perpetual succession?
A company continues to exist despite the death, retirement or sale of shares by its shareholders.
What happens to a partnership when a partner retires?
Unless the agreement provides otherwise, a partner in a partnership at will leaves by giving notice, which dissolves the partnership; the remaining partners may then form a new one. A partnership agreement can set out a different exit process.