Types of Business & Sources of Finance (Cambridge (CIE) IGCSE Accounting): Flashcards
Exam code: 0452 & 0985
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Define a sole trader.
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Define a sole trader.
A sole trader is a person who owns and controls a business on their own. No formal permission is needed to set one up, which makes it the simplest business form to start.
Complete the sentence about who runs a sole trader's business:
A sole trader may
other people to help run the business, but is still the only of it.The completed sentence is:
A sole trader may employ other people to help run the business, but is still the only owner of it.
Give two advantages of operating as a sole trader.
A sole trader:
keeps all of the profit the business makes
can make decisions quickly, without needing to consult anyone else
has simpler book-keeping and accounting to do than larger business forms
Define unlimited liability.
Unlimited liability means the owner and the business are treated as one entity, with no legal separation between them. If the business cannot pay its debts, the owner's personal possessions can be taken to pay them.
Give two disadvantages of operating as a sole trader.
A sole trader:
bears all of the responsibility for any losses the business makes
has no one to share the workload or the decisions with
is limited in the amount of capital they can put into the business
may earn nothing during periods of illness or holiday
True or False?
A sole trader must make their financial statements available to the public.
False.
A sole trader's financial statements are private. There is no requirement to publish them, so competitors cannot see how the business is performing.
Why is a sole trader usually limited in how much capital they can put into the business?
There is no one else to contribute, so the capital is limited to whatever the single owner can provide. A business with more than one owner can draw on more than one person's resources.
Define a partnership.
A partnership is a business owned by two or more people who run it together with the aim of making a profit. The partners are the owners of the business, not its employees.
Give two advantages of operating as a partnership.
Partners:
can raise more capital, because every partner contributes to it
bring different skills and expertise to the business
share the risks of running it
can cover for each other during illness and holidays
Complete the sentence about the size of a partnership:
A partnership normally consists of between two and
partners.The completed sentence is:
A partnership normally consists of between two and twenty partners.
Give two disadvantages of operating as a partnership.
Partners:
must share the profits between them
may disagree with one another about how to run the business
may take longer to reach decisions, because their opinions differ
True or False?
A partnership can be formed by a sole trader who wants to expand the business.
True.
A sole trader who wants to grow can take on a partner rather than starting a new business. Two or more sole traders can also combine their money and assets to form a partnership together.
One partner runs up a debt on behalf of the business. Who is responsible for repaying it?
All of the partners are responsible, not only the partner who created the debt. Each partner is therefore exposed to the decisions the others make.
Define a limited company.
A limited company is a business owned by a group of people, whose ownership is divided into shares. The people who buy those shares are the shareholders.
What is the difference between a private and a public limited company?
The difference is who can buy the shares. Anyone can buy shares in a public limited company (PLC), while shares in a private limited company (Ltd) are not sold publicly.
Complete the sentence about the value of a share:
The monetary value of a share is called its nominal value, also known as its face value or its
value.The completed sentence is:
The monetary value of a share is called its nominal value, also known as its face value or its par value.
Define limited liability.
Limited liability means the company is a separate entity from its owners, so the owners are liable only for the amount they have invested. If the company fails, a shareholder loses their investment but nothing more.
Give two advantages of operating as a limited company.
A limited company:
can usually raise more capital than a sole trader or a partnership
gives its owners limited liability, which the other business forms do not
Define a dividend.
A dividend is the reward a shareholder receives for investing money in a limited company. It is paid as a proportion of the face value of the shares they hold.
A shareholder holds 4000 shares and the dividend is $0.05 per share. What dividend do they receive?
The shareholder receives $200. The dividend paid is number of shares × dividend per share, so 4000 × $0.05 = $200.
True or False?
A limited company must pay its shareholders a dividend every year.
False.
Dividends are paid out of the profits the company makes, so there may be nothing to pay in a year when it does not make one. A shareholder's return is not guaranteed.
Give two disadvantages of operating as a limited company.
A limited company:
must meet more legal requirements, including audits and publishing its financial statements
costs more to set up than a sole trader business or a partnership
Define a trading business.
A trading business buys goods and then sells them on without changing them. Grocery stores and car dealerships are examples.
True or False?
One business can be a trading business and a manufacturing business at the same time.
True.
Many businesses do a mix of the three. A sandwich shop that makes its own sandwiches but buys in crisps and drinks to sell is both manufacturing and trading.
Define a service business.
A service business provides a service rather than buying or selling goods. Insurance companies, accountants, travel agents and hairdressers are examples.
Does a business's legal form, such as sole trader or limited company, decide whether it is trading, service or manufacturing?
Any legal form can be a trading, service or manufacturing business. A sole trader can be a manufacturer, and a limited company can be a service business.
Define a manufacturing business.
A manufacturing business produces the goods it sells, rather than buying them ready-made. Clothes factories and food factories are examples.
What is the difference between a short-term and a long-term source of finance?
Short-term sources are repaid within a year, while long-term sources are repaid over several years. An overdraft and trade credit are short-term, whereas a bank loan is long-term.
Define a bank overdraft.
A bank overdraft lets a business spend more money than it has in its bank account. Interest is charged only on the amount actually used, and the funds are available immediately.
Give one drawback of relying on a bank overdraft to finance a business.
An overdraft:
carries high interest rates
is usually limited to a fairly small amount
can be relied on too heavily, so the business never clears it
Define trade credit.
Trade credit is where a business receives goods or assets now and pays for them at a later date. It is usually interest-free if the business pays on time.
How does taking trade credit improve a business's working capital?
The cash stays in the business for longer, because payment is delayed. That leaves more money available for day-to-day trading in the meantime.
Define a debenture.
A debenture is a long-term loan made to a limited company by an investor. The company pays interest each year and repays the full amount on an agreed future date.
What is the main difference between leasing an asset and buying it on hire purchase?
The difference is ownership. Under leasing the business rents the asset and never owns it, while under hire purchase it pays a deposit and instalments and owns the asset once the final payment is made.
True or False?
Money put into a business by its own owner counts as a source of finance.
True.
The owner's own capital is a source of finance, and it carries no interest and never has to be repaid. It is only available to sole traders and partnerships, and the owner loses it if the business fails.
Give two advantages to a business of raising finance through a bank loan.
A bank loan:
makes large amounts of cash available
has regular, fixed repayments, which are easy to budget for
leaves the owners in full control of the business
spreads the cost of an asset over several years
Give two disadvantages to a business of raising finance through a bank loan.
A bank loan:
carries interest, which adds to the total cost
must be repaid whether the business makes a profit or a loss
may require the business to offer an asset as security
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