All questions are taken from the AS Accounting for AQA Question Bank text book. There are possible answers to these questions, these are just examples.
(1) Q Jane and Scott are proposing to start a new business together which requires capital of £70,000. Jane and Scott can contribute £15,000 each. There is a good chance of making a significant profits, but there is also a chance that the business could fail. A friend has advised that they form a private limited company.
Explain two reasons why Jane and Scott should not form a private limited company.
A As Scott and Jane will only be able to contribute £15,000 each, they will need £40,000 of a contribution from the selling shares. This means that most of the company will be run from these other share holders rather than themselves. This means main decisions of the business will have to be discussed with all the shareholders so they may not always get the decisions they wish for. Though this also means that they have limited liability to the company and will only be able to lose the money they have put into the business.
Also dividends will have to paid yearly. This will come out of the retained profits of the company which means that they may struggle to continue business if the business is not has successful as they wished. Also the profits will have to be split between all share holders depending on there shares in the business, so most of the profits will be going to other shareholders rather than Jane and Scott.
To conclude forming a private limited company would cause they to lose there profits and power, though this could be the best option for this type of business. First they would have to consider there chance of borrowing money rather than getting it from selling shares and also what other business they could form, such as a sole trader or a partnership.
(2a) Q Explain the following 2 accounting concepts; Prudence and Consistency.
A Prudence: This concept is when there is a doubt assets and profit are to be understated with a conservative figure rather than an overstated figure. If they use an overstated figure they would be giving miss leading information to there stakeholders.
Consistency: This concept requires that when you take on an accounting policy you must be consistent and continue using this. This ensures that all your financial statements are created the same way each year, so that comparisons over the years of the statements will mean more and be more accurate on what happened between these years. Therefor forecasting will be more accurate for the future. Businesses are only aloud to make changes that are not consistent with good reasoning.
(2b) Q Explain the importance of applying these two accounting concepts when preparing the financial statements of a business.
A Prudence is useful for valuation of stock, if a part of stock becomes damaged there will need to be a revaluation made.…