Test Bank Ch3 Business Structures

Testbank

to accompany

Accounting: business reporting for decision making

7th edition

by

Birt et al.

Not for distribution. Instructors may assign selected questions in their LMS.

© John Wiley & Sons Australia, Ltd 2020

Chapter 3: Business structures

Learning objectives

1. Understand the different forms that business entities take

Q1, Q2, Q3, Q54, Q55

2. Define the term ‘sole trader’ and discuss the main features of a sole trader

Q4, Q5, Q6, Q7, Q56

3. Discuss the advantages and disadvantages of a sole trader

Q8, Q9, Q57

4. Define the term ‘partnership’ and discuss the main features of a partnership

Q10, Q11, Q12, Q13, Q14, Q58

5. Discuss the advantages and disadvantages of a partnership

Q15, Q16, Q59

6. Define the term ‘company’

Q17, Q18, Q19, Q20, Q21, Q60, Q61

7. Identify the different types of companies and provide examples of each

Q22, Q23, Q24, Q25, Q26, Q27, Q28, Q62

8. Discuss the advantages and disadvantages of a company

Q29, Q30, Q31, Q63, Q64

9. Define the term ‘trust’

Q32, Q33, Q34, Q65, Q66

10. Discuss the advantages and disadvantages of a trust

Q35, Q36, Q37, Q67

11. Compare financial statements for different business structures

Q38, Q39, Q40, Q41, Q42, Q43, Q44, Q45, Q46, Q47, Q48, Q49, Q68, Q69, Q70

12. Explain the term ‘differential reporting’ and discuss the implications for disclosing entities.

Q 50, Q51, Q52, Q53, Q71, Q72

Multiple-choice questions

1. What is the focus of business entities?

a. Services

b. Trading

c. Manufacturing

d. All of the above

Learning objective 3.1 ~ Understand the different forms that business entities take

1. What are the four types of business structures of ‘for-profit’ entities?

a. Sole trader, partnership, multi-national and joint venture

b. Consolidated, trust, partnership and company

c. Trust, company, sole trader and partnership

d. Company, partnership, trust and joint venture

Learning objective 3.1 ~ Understand the different forms that business entities take

1. ‘For-profit’ business structures differ in terms of:

a. equity structure.

b. owner liability.

c. taxation.

d. all of the above.

Learning objective 3.1 ~ Understand the different forms that business entities take

1. Which of the following statements about the sole trader form of business organisation is true?

a. It must have at least two owners.

b. It consists of one individual who controls and manages the business.

c. It combines the records of the business with the personal records of the owner.

d. It is classified as a separate legal entity.

Learning objective 3.2 ~ Define the term ‘sole trader’ and give the main features of a sole trader

1. Gary Brown owns and operates a small house-painting service. What is the most likely business structure for Gary’s business?

a. Sole trader

b. Trust

c. Partnership

d. Company

Learning objective 3.2 ~ Define the term ‘sole trader’ and give the main features of a sole trader

1. A sole trader business owner:

a. is personally liable for all debts incurred by the business.

b. is not bound by the formal requirements of accounting standards.

c. is taxed as an individual on the business income.

d. all of the above.

Learning objective 3.2 ~ Define the term ‘sole trader’ and give the main features of a sole trader

1. A business that is not a separate legal entity, where any claims for business debts can be made against the owner’s personal assets, is a:

a. trust.

b. sole trader.

c. proprietary company.

d. joint venture.

Learning objective 3.2 ~ Define the term ‘sole trader’ and give the main features of a sole trader

1. An advantage of operating as a sole trader is:

a. the business is limited by the skill, time and investment of the owner.

b. the business is not a separate legal entity.

c. the owner has unlimited liability.

d. the owner claims all the profits if the business is sold.

Learning objective 3.3 ~ Discuss the advantages and disadvantages of a sole trader

1. A disadvantage of being a sole trader is:

a. may pay higher taxes on business income.

b. having a business that is inexpensive to start up and wind down.

c. having very little government regulation.

d. having total autonomy over business decisions.

Learning objective 3.3 ~ Discuss the advantages and disadvantages of a sole trader

1. Which of the following are characteristics of a partnership?

a. Easy transfer of ownership and no personal liability.

b. Shared control and increased skills and resources.

c. Harder to raise funds and gives the owner full control.

d. Separate taxation requirements and substantial government regulation.

Learning objective 3.4 ~ Define the term ‘partnership’ and discuss the main features of a partnership

1. Which of the following does not apply to a partnership business?

a. Minimal costs to establish

b. Pays taxation separately to that of the owners

c. An annual tax return must be prepared

d. An ABN must be applied for

Learning objective 3.4 ~ Define the term ‘partnership’ and discuss the main features of a partnership

1. If the partnership agreement does not contain profit sharing arrangements, then Australian law states that profits and losses must be shared:

a. according to the amount of work performed by each partner.

b. in proportion to the capital contribution of each partner.

c. based on the capital, skills and workload contributed by each partner.

d. equally between all partners.

Learning objective 3.4 ~ Define the term ‘partnership’ and discuss the main features of a partnership

1. The profit for a partnership must be distributed:

a. according to the partnership agreement.

b. equally among the partners.

c. according to the workload contribution of each partner.

d. according to the capital contributions of each partner.

Learning objective 3.4 ~ Define the term ‘partnership’ and discuss the main features of a partnership

1. When setting up a partnership each partner can contribute:

a. talent.

b. knowledge.

c. capital.

d. all of the above.

Learning objective 3.4 ~ Define the term ‘partnership’ and discuss the main features of a partnership

a. each partner has limited liability for the debts incurred on a contract entered into by any other partner.

b. each partner must contribute the same capital and skills to the partnership.

c. each partner has the right to enter into contracts on behalf of the partnership.

d. only the partner with the highest cash contribution has the right to enter into contracts on behalf of the partnership.

Learning objective 3.5 ~ Discuss the advantages and disadvantages of a partnership

1. Which of the following is an advantage of a partnership over a sole trader business?

a. greater access to skills and resources.

b. limited liability.

c. not required to prepare financial statements in accordance with accounting standards.

d. mutual agency.

Learning objective 3.5 ~ Discuss the advantages and disadvantages of a partnership

1. Which of the following options is a characteristic of a company business structure?

a. Not a separate legal entity

b. Owners pay individual tax on company profits

c. Owners have limited liability

d. Easy to set up

Learning objective 3.6 ~ Define the term ‘company’

1. In what form of business are the owners referred to as ‘shareholders’?

a. Sole trader

b. Partnership

c. Trust

d. Company

Learning objective 3.6 ~ Define the term ‘company’

1. Which of the following sets of characteristics can be attributed to a company?

a. Separate legal entity and owners have limited liability.

b. Simple to set up and mutual agency.

c. Difficulty raising funds, owners have full control.

d. Owners have shared control and unlimited liability.

Learning objective 3.6 ~ Define the term ‘company’

1. Limited liability for a company applies to the:

a. shareholders.

b. executive directors.

c. all members of the board of directors.

d. managers.

Learning objective 3.6 ~ Define the term ‘company’

1. With which regulatory authority must a company be registered?

a. Australian Securities and Investments Commission

b. Australian Securities Exchange

c. Corporations Act

d. CPA Australia

Learning objective 3.6 ~ Define the term ‘company’

1. A public company with its share capital limited by guarantee is a popular business structure for which type of entity?

a. Not-for-profit charity

b. Mining company

c. Investment company

d. Any of the above

Learning objective 3.7 ~ Identify the different types of companies and provide examples of each

1. Which of the following is not true for a private company?

a. It is a common form of business structure for large-sized entities.

b. The company name includes the words ‘Pty Ltd’.

c. It is relatively easy to set up.

d. It can have up to 50 shareholders.

Learning objective 3.7 ~ Identify the different types of companies and provide examples of each

1. Which of the following statements is true?

a. A public company may be a company limited by guarantee.

b. A public company can issue either ordinary or preference shares.

c. A public company must follow the requirements of the Corporations Act 2001.

d. All of the statements are true.

Learning objective 3.7 ~ Identify the different types of companies and provide examples of each

1. Which of the following describes a type of public company?

a. Share capital that is limited by shares.

b. Unlimited share capital.

c. Share capital that is limited by guarantee.

d. All of the above.

Learning objective 3.7 ~ Identify the different types of companies and provide examples of each

1. Private companies in Australia are permitted to have how many shareholders?

a. A maximum of two

b. At least two but no more than 100

c. At least one but no more than 50

d. At least one but no more than 20

Learning objective 3.7 ~ Identify the different types of companies and provide examples of each

1. Which of the following statements regarding a ‘no-liability’ company is false?

a. The company’s operations are of a risky nature.

b. If the company becomes insolvent shareholders are still required to pay any outstanding amounts owed on their shares.

c. In Australia, no-liability companies are solely mining companies.

d. The shareholders are not liable for the outstanding debts of the company.

Learning objective 3.7 ~ Identify the different types of companies and provide examples of each

1. Which of the following statements is true for a company limited by shares?

a. The company must have a minimum of three directors.

b. If the company goes into liquidation, preference shareholders have priority over ordinary shareholders.

c. The shareholders’ liability is limited to the subscription price of the shares.

d. All the above statements are true.

Learning objective 3.7 ~ Identify the different types of companies and provide examples of each

1. Which of the following is an advantage of the company form of business?

a. It is cheap and easy to establish

b. It has a limited life

c. Its owners have a say in the day-to-day operations of the company

d. It has the ability to raise large amounts of capital

Learning objective 3.8 ~ Discuss the advantages and disadvantages of a company

1. Which of the following would be a disadvantage of a private company going public?

a. Potential loss of ownership and control.

b. Greater disclosure requirements for financial reports.

c. Costs associated with issuing shares.

d. All options are disadvantages.

Learning objective 3.8 ~ Discuss the advantages and disadvantages of a company

1. Which of the following is a disadvantage of the company form of business?

a. It has an unlimited life.

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

c. Its shareholders have limited liability for debts incurred by the business.

d. It has the ability to raise large amounts of capital.

Learning objective 3.8 ~ Discuss the advantages and disadvantages of a company

1. Where assets are held for the benefit of other parties, which of the following forms of business structure is most likely to be used?

a. Company

b. Trust

c. Sole trader

d. Partnership

Learning objective 3.9 ~ Define the term ‘trust’

1. A unit trust has all but which of the following characteristics?

a. Provides the trustee with discretion, according to the trust deed, over who receives distributions from the trust.

b. Income is distributed to the parties according to their respective unit holdings in the trust.

c. Holds a collection of assets on behalf of various members rather than only family members.

d. Usually concentrates on a particular investment such as equity, property or cash management.

Learning objective 3.9 ~ Define the term ‘trust’

1. A family trust is a trust:

a. which holds a collection of assets on behalf of various non-family members.

b. from which income is distributed to the family members according to their respective unit holdings in the trust.

c. that has a variety of investments in equity, property and cash management.

d. which provides the trustee with discretion, according to the trust deed, over who receives distributions from the trust.

Learning objective 3.9 ~ Define the term ‘trust’

1. Which of the following options is a disadvantage of a trust?

a. A complex legal structure

b. Minimal government regulation

c. Difficult and expensive to set up

d. Tax minimisation

Learning objective 3.10 ~ Discuss the advantages and disadvantages of a trust

1. Individuals who pay tax on the income distributed to them may have received that income from a:

a. sole trader.

b. partnership.

c. trust.

d. all of the above.

Learning objective 3.10 ~ Discuss the advantages and disadvantages of a trust

1. Which of the following business entities is not required to prepare a tax return?

a. Partnership

b. Trust

c. Company

d. Sole trader

Learning objective 3.10 ~ Discuss the advantages and disadvantages of a trust

1. Dividends paid to shareholders:

a. increase expenses.

b. decrease retained earnings.

c. increase assets.

d. decrease income.

Learning objective 3.11 ~ Compare financial statements for different business structures

1. What is the difference between a sole trader’s and a partnership’s financial statements?

a. Sole trader financial statements must be prepared according to the AASB accounting standards.

b. Partnership capital has more than one account.

c. Partnership financial statements are simpler to prepare.

d. There is no difference.

Learning objective 3.11 ~ Compare financial statements for different business structures

1. Retained earnings at the end of the period are equal to:

a. assets minus dividends.

b. retained earnings at the beginning of the period plus profit earned for the period.

c. retained earnings at the beginning of the period plus profit earned for the period minus dividends.

d. retained earnings at the beginning of the period plus profit earned for the period minus expenses.

Learning objective 3.11 ~ Compare financial statements for different business structures

1. Which financial statement must be prepared before others can be completed?

a. Statement of cash flows

b. Statement of financial position

c. Statement of profit or loss

d. Statement of financial position

Learning objective 3.11 ~ Compare financial statements for different business structures

1. People First Consulting Pty Ltd started the year with total assets of $80 000 and total liabilities of $40 000. During the year the business earned $150 000 in income, incurred $95 000 in expenses and dividends of $20 000 were paid. What was People First Consulting Pty Ltd’s profit for the period?

a. $35 000

b. $55 000

c. $40 000

d. $30 000

Learning objective 3.11 ~ Compare financial statements for different business structures

1. People First Consulting Pty Ltd started the year with total assets of $80 000 and total liabilities of $40 000. During the year the business earned $150 000 in income, incurred $95 000 in expenses and dividends of $20 000 were paid. What was People First Consulting Pty Ltd’s equity at the end of the period?

a. $20 000

b. $40 000

c. $45 000

d. $75 000

Learning objective 3.11 ~ Compare financial statements for different business structures

1. If equity decreased by $10 000 and total liabilities increased by $15 000 over a period, by how much did total assets change?

a. $15 000 increase

b. $25 000 increase

c. $5000 decrease

d. $5000 increase

Learning objective 3.11 ~ Compare financial statements for different business structures

1. What is the name of the financial statement that is concerned with an entity at a point in time?

a. Statement of profit or loss

b. Comprehensive statement of profit or loss

c. Statement of financial position

d. Statement of cash flows

Learning objective 3.11 ~ Compare financial statements for different business structures

1. Which of the following expenses would not appear in a partnership statement of profit or loss?

a. Income tax expense

b. Interest expense

c. Depreciation expense

d. Advertising expense

Learning objective 3.11 ~ Compare financial statements for different business structures

1. In which type of entity’s financial statements would a retained earnings account be found?

a. Sole Trader

b. Company

c. Partnership

d. All of the above

Learning objective 3.11 ~ Compare financial statements for different business structures

1. MJ Customs is a partnership with four partners. How many capital accounts are required in the equity section of the statement of financial position?

a. One

b. Two

c. Four

d. Eight

Learning objective 3.11 ~ Compare financial statements for different business structures

1. If equity increased by $15 000 and total liabilities increased by $35 000 over a period, by how much must total assets have changed?

a. $50 000 decrease

b. $20 000 increase

c. $50 000 increase

d. $20 000 decrease

Learning objective 3.11 ~ Compare financial statements for different business structures

1. Differential reporting refers to:

a. the difference between the statement of profit or loss and the statement of financial position.

b. the difference between the financial statements of a sole trader and a partnership.

c. the difference in financial reporting requirements for disclosing entities.

d the differences between IFRS and AASB accounting standards.

Learning objective 3.12 ~ Explain the term ‘differential reporting’ and discuss the implications for disclosing entities

1. The reduced disclosure requirements implemented by the AASB in 2013 enable:

a. Tier 1 entities to reduce the volume of disclosure notes to the financial statements.

b. all entities to reduce the number of financial statements produced.

c. Tier 2 entities to reduce the volume of disclosure notes to the financial statements.

d. all entities to reduce the volume of disclosure notes to the financial statements.

Learning objective 3.12 ~ Explain the term ‘differential reporting’ and discuss the implications for disclosing entities

1. The full implementation of differential reporting came into effect on:

a. 1 January 2015 and has since been updated with the new standard from 1 January 2018.

b. 1 July 2013 and has since been updated with the new standard from 1 July 2015.

c. 1 January 2014 and has since been updated with the new standard from 1 January 2019.

d. 1 July 2014 and has since been updated with the new standard from 1 July 2017.

Learning objective 3.12 ~ Explain the term ‘differential reporting’ and discuss the implications for disclosing entities

1. Under the differential reporting regime, the reduction in requirements for disclosing entities that are not publicly accountable would include which of the following?

a. Disclosures relating to financial statement presentation

b. Disclosures relating to the usage of financial instruments

c. Disclosures relating to income tax

d. All of the above

Learning objective 3.12 ~ Explain the term ‘differential reporting’ and discuss the implications for disclosing entities

Fill in the blanks

1. Manufacturing entities are involved in the conversion of raw materials into _____________ _____________.

a. finished goods

Learning objective 3.1 ~ Understand the different forms that business entities take

1. Gym classes and excavation of building sites are examples of _________________ services.

a. equipment-based

Learning objective 3.1 ~ Understand the different forms that business entities take

1. An individual who manages and controls a business is known as a ___________

___________.

a. sole trader

Learning objective 3.2 ~ Define the term ‘sole trader’ and give the main features of a sole trader

1. A major (advantage/disadvantage) ____________________ of a sole trader is the set up costs.

a. advantage

Learning objective 3.3 ~ Discuss the advantages and disadvantages of a sole trader

1. It is recommended that business partners draw up a written partnership ____________ to record details such as the contributions made by each partner.

a. agreement

Learning objective 3.4 ~ Define the term ‘partnership’ and discuss the main features of a partnership.

1. __________ __________ is when each partner has the right to enter into, and be bound by, any partnership contract.

a. Mutual agency

Learning objective 3.5 ~ Discuss the advantages and disadvantages of a partnership

1. The owners of a company are known as ______________.

a. shareholders

Learning objective 3.6 ~ Define the term ‘company’

1. A company is a separate _______________ entity to the owners of the business.

a. legal

Learning objective 3.6 ~ Define the term ‘company’

1. _______________ shares rank ahead of _______________ shares if the company goes into liquidation.

a. preference, ordinary

Learning objective 3.7 ~ Identify the different types of companies and provide examples of each

1. Some businesses may refuse to supply their goods and services to a company as the shareholders are not _______________ liable for the company debts.

a. personally

Learning objective 3.8 ~ Discuss the advantages and disadvantages of a company

1. The main (advantage/disadvantage) _________________ of a company is that its shareholders have limited liability for the business’ debts.

a. advantage

Learning objective 3.8 ~ Discuss the advantages and disadvantages of a company

1. In Australia a discretionary trust is also known as a _____________ trust.

a. family

Learning objective 3.9 ~ Define the term ‘trust’

1. In a unit trust, income is distributed to the parties according to their respective _____________ holdings in that trust.

a. unit

Learning objective 3.9 ~ Define the term ‘trust’

1. A major advantage of trusts is that they ________________ tax payments.

a. minimise

Learning objective 3.10 ~ Discuss the advantages and disadvantages of a trust

1. The financial report that details assets, liabilities and equity is the ________________ ________________ ________________ ________________.

a. statement of financial position

Learning objective 3.11 ~ Compare financial statements for different business structures

1. The financial report that details the income and expenses of a business is called the statement _____________ _____________ _____________ _____________.

a. of profit or loss

Learning objective 3.11 ~ Compare financial statements for different business structures

1. _____________ _____________ represent a company’s profits that have been held in the business and not paid out as dividends

a. Retained earnings

Learning objective 3.11 ~ Compare financial statements for different business structures

1. The AASB’s modified reporting requirements for Tier 1 and Tier 2 disclosing entities is known as ________________ ________________.

a. differential reporting

Learning objective 3.12 ~ Explain the term ‘differential reporting’ and discuss the implications for disclosing entities

1. Disclosing entities that are classified as Tier 2 use the ________________ disclosure requirements when preparing general purpose financial statements.

a. reduced

Learning objective 3.12 ~ Explain the term ‘differential reporting’ and discuss the implications for disclosing entities