Part 1

An Overdraft Facility

Definition

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It is a formal credit arrangement with a financial institution that permits an account holder to use or withdraw excess cash balance in their account, up to an agreed limit. (O. Wallace, n.d) It is a facility ready for immediate, unforeseen financial needs, but negative balance typically needs to be repaid within a month. Overdraft fees may be charged by the bank for an overdraft facility access. Banks also charge an interest rate which is based on the amount overdrawn – usually at a higher rate.

Advantages

1. An overdraft is there when you need it. You only borrow what you need at a time, which could make it cheaper than a loan. (bizhelp24, 2009)

2. Overdrafts are easy and quick to arrange. (bizhelp24, 2009)

3. Interest is to be paid only for the overdrawn amount. (Jigneshbapna, 2012)

4. No additional expenses for pre-payment of bank overdraft. (Jigneshbapna, 2012)

Disadvantages

1. Interest is charged on the overdrawn amount, but the interest rate is nearly always variable- often at much higher rates, making it difficult to accurately calculate the total cost of borrowing. (bizhelp24, 2009)

2. Because of the availability of overdraft, we may overspend, and administration fees may be charged when you exceed the specified limit. (bizhelp24, 2009)

3. Overdrafts may need to be secured against business assets – which put them at risk if you cannot repay the overdraft. (bizhelp24, 2009)

4. Maintaining a current account is necessary for overdraft facility. (blurtit, n.d)

A long-term loan from a financial institution

Definition

A long-term loan is a form of debt with a prolonged time of period for repayment normally lasting between 3 and 30 years. Obtaining a long term loan provides an organization with working capital to develop property or stock or to finance plant and machinery which can then be used to generate additional profit for the business. A company must disclose its long-term loan on its balance sheet with its date of maturity and interest rate. (Ycharts, 2012)

Advantages

1. Long-term loans boast long lifespan. Long-term loans always run for more than 3 years. (Don Rafner, n.d)

2. A payment schedule – Some long-term loans require quarterly payments, while others call for a monthly fee or some other arrangement. (Don Rafner, n.d)

3. Long-term loans can help a business to grow financially. (Lee Morgan, n.d)

4. Long-term loans normally have lower interest rates. (Lee Morgan, n.d)

Disadvantages

1. The total payoff at the end of the period will likely reveal that a business has paid back considerably more money than they received initially. (Lee Morgan, n.d)

2. Challenging to get approved – The applicant must prove his ability to repay the loan before the bank will consider approving the application. (Lee Morgan, n.d)

3. New businesses usually finds it more difficult to obtain long-term debt financing, because they have no proven track record, low cash flow, and small asset base. (Don Rafner, n.d)

4. A person or a business may be facing foreclosure or repossession of the property, if he misses payments. In addition, he could also face penalties and legal issues. (Don Rafner,

A finance lease agreement

Definition

A financial lease is a condition where a finance company or other lessor finances goods to clients. The lessor purchases an asset, and then leases that asset to a client or lessee for a certain amount of time. This enables the client to use the equipment for the duration of the lease agreement. He is also responsible for the maintenance, insurance, and taxes. Ownership does not pass to the client automatically, once a client has fulfilled the terms of the lease, including the payment of any applicable interest, the client has the option to purchase the asset at an extremely low price. (Malcolm Tatum, n.d)

Advantages

1. Depreciation and obsolescence risk does not affect the lessee. (Shabarigirish, 2012)

2. A lease is a quick and easy method. (Shabarigirish, 2012)

3. The periodic lease rents paid by the lessee can be deducted as a business expense on your tax return. (Shabarigirish, 2012)

4. It offers the flexibility of the repayment period being matched to fit a person’s needs and budget. (allbusiness, n.d)

Disadvantages

1. Lack of ownership – The lessor could not sell the asset because it is not in his possession. (Shabarigirish, 2012)

2. The client does not have full ownership over the asset, unless he decides to purchase the asset at the end of lease. (Shabarigirish, 2012)

3. A substantial early termination fees will be charged if the lessee wishes to terminate the lease at his will. (allbusiness, n.d)

4. The client is responsible for monthly payments, and for equipment maintenance. (Shabarigirish, 2012)

A hire purchase agreement for the necessary non-current assets required in the expansion

Definition

A Hire-Purchase agreement is an agreement whereby consumers borrow money to hire the goods that he cannot afford to buy immediately for a period of time, by paying installments. The consumer has certain rights over the goods but does not actually own them until installment is paid fully. It gives the consumer an option to purchase the item at the end of the agreement. Hire purchase agreements usually last between two and five years. Under the hire purchase agreement, the business ends up paying more than the original value of the asset for its purchase. (Citizens information, 2012)

Advantages

1. The consumer gains use of the asset while they are still paying for it. (don_zulkey, 2012)

2. The payment is made in affordable installments; Hire purchase installments are taxable expenditures. (don_zulkey, 2012)

3. Ownership of the asset can be transferred to the consumer after paying full installments. (don_zulkey, 2012)

4. Payments can be made from the asset’s usage and return of the asset. (don_zulkey, 2012)

Disadvantages

1. Ownership remains with the lender until the consumer has paid in full. (don_zulkey, 2012)

2. The consumer will end up paying more than the original value of the asset. (don_zulkey, 2012)

3. The asset can be repossessed by the lender when the consumer misses payments. (don_zulkey, 2012)

4. A hire-purchase can be terminated at any time, but penalties will be charged for early removal. (don_zulkey, 2012)

The formation of a partnership

Definition

A partnership is an alliance of two persons or more contributing money or industry to a common fund with the objective of sharing the income of the business among them. (bum_24, n.d) The establishment of a partnership requires a voluntary “association” who “co-own” the business and create revenue for the business. (Farlex, n.d) Although partnership may be implied from the conduct or course of dealing of the parties, it is recommended to form a partnership by a written agreement. This agreement is called a Deed of Agreement which should be adequately stamped. (Sree Rama Rao, 2011)

Advantages

1. Lower tax burden. (bum_24, n.d)

2. Unlimited liability. (bum_24, n.d)

3. Greater capital compared to sole proprietorship. (bum_24, n.d)

4. There is a greater continuity of the business when compared with a sole proprietor – If one partner dies, then the partnership has to be dissolved. But the remaining partners can then start a new partnership with a new Deed of Agreement. (bum_24, n.d)

Disadvantages

1. Disagreement/conflict among partners can lead to dissolving of partnership. (bum_24, n.d)

2. Unlimited liability. (bum_24, n.d)

3. Difficulty in transferring ownership. (bum_24, n.d)

4. Limited expansion of business due to limited number of partners (Maximum of 20 partners only) (bum_24, n.d)

Part 2

Qualitative Characters of Financial Statement

Qualitative characteristics are the properties to satisfy the information needs of various users. (D. Victor, 2010) The principal purpose of financial statements is to serve as a guide for data-users in measuring critical variables that affect the viability and profitability of the business firm. (John Louie Ramos, 2011) False or improper data can obstruct decision-making or cause business owners to make wrong reviews about their companies. (Osmond Vitez, n.d) There are four main qualitative characteristics – relevance; reliability; understandability; and comparability.

Comparability.

Comparability is the ability to compare one company’s accounting statements to another company’s data (Osmond Vitez, n.d), it is the capability to assist users see similarities and dissimilarities between situations and events of information (Intermediate Accounting, 4/e, n.d) The statements must be comparable with the consolidated entity from the entity (through time) and with previous statements of other entities, so that users can identify trends in the performance and financial position of the reporting entity. (Steven Bragg, 2011) In addition, consumers should be informed of the accounting policies used in the preparation of financial statements, and any changes in the procedure and the impact of those changes. (Triple M Accounting, n.d)

Verifiability

“Reliability is the quality of financial statements that enables the user to rely upon the information with confidence. Reliability measures lies in the loyalty that it represents what it intent to represent, along with a guarantee for the user, which comes through verification, that it has that quality of representation” (Concepts Statement 2, paragraph 59).

Reliability is divided into two parts – representational faithfulness and verifiability.

Verifiability is an important component of reliability. (Putra, 2009) Verifiability is “the capability through unanimity among different operations to affirm that information represents what it intent to represent or that the chosen form of evaluation used is unbiased and free from errors” (Concepts Statement 2, glossary).

The first concept of verifiability shows that different views generally will reach an agreement between a number of people (IASB, 2006).

Verification should be reached on two aspects:

1. The information represents the economic phenomena that it aims to illustrate without bias or inaccuracy and;

2. That the chosen form of evaluation used is unbiased and free from errors.

Timeliness

“To be relevant to creditors, investors and others for credit, investment and similar adjustments, accounting statements must have the ability to influence an evaluation by helping users to form estimations about the aftermath of future, current and historical events or to correct and confirm expectations” (Concepts Statement 2, paragraph 47)

Timeliness means “having material obtainable to users early enough before it loses its ability to affect the assessments” (Concepts Statement 2, glossary). The need for timely data requires that companies present information to external users periodically. Information that is not available when it is needed or becomes available only long after it has value for future action is futile. (Putra, 2009)

Understandability.

The capability of users to perceive financial statements will depend on the illustrated information and on their own intelligence. (SAC 3, n.d) While financial statements can be somewhat complicated for the uninitiated to understand, the information must be easily understood by the users. (Steven Bragg, n.d) This applies to the layout of the statement; the terms used in the statement, methods and assumptions and the policies utilized in preparing the statement. (D. Victor, 2010) Users of financial statements, on the other hand should have sufficient knowledge to study the correct information. Understandability ensures that users are equipped with the basic knowledge and can distinguish information related to the performance and financial position of an enterprise. (D. Victor, 2010) This is a user-specific quality because users will differ in their ability to understand any set of information. General purpose of financial reports should be constructed taking into account the interest of users who are willing to undertake efforts in analyzing those reports and who have the necessary skills to understand the importance of contemporary accounting exercises. (J. David Spiceland, n.d)

References

Part 1

1. Overdraft Facility: Definition – S.E. Smith, O. Wallace, What Is an Overdraft Facility?, Viewed on 28th October, http://www.wisegeek.com/what-is-an-overdraft-facility.htm, http://www.businessdictionary.com/definition/overdraft-facility.html.

Advantages & Disadvantages – August 22, 2009, Overdraft Finance – Advantages and Disadvantages, Viewed on 28th October, http://www.bizhelp24.com/money/business-finance/overdraft-finance-advantages-and-disadvantages.html, http://www.blurtit.com/q5855798.html,

June 13th 2012, ADVANTAGES & DISADVANTAGES OF OVERDRAFT, http://www.jigneshbapna.com/loan/advantages-disadvantages-of-overdraft.html

2. Long-term loan: Definition – Viewed on 28th October, http://www.answers.com/topic/term-loan, http://ycharts.com/glossary/terms/long_term_debt, http://www.businessdictionary.com/definition/long-term-loan.html

Advantages & Disadvantages – Lee Morgan, Viewed on 28th October, http://www.ehow.co.uk/list_6663086_long_term-loans_-advantages-_amp_-disadvantages.html

Don Rafner, eHow Contributor, Viewed on 28th October, http://www.ehow.com/facts_5637049_long_term-loans_.html

3. Finance lease: Definition – Malcolm Tatum, Viewed on 28th October, http://www.wisegeek.com/what-is-a-financial-lease.htm, http://www.exportfinance.gov.au/Pages/financelease.aspx#content

Advantages & Disadvantages – Viewed on 28th October, http://www.allbusiness.com/business-finance/leasing/2540-1.html#axzz2AfTQiOzC, http://shabarigirish.hubpages.com/hub/Advantages-of-Lease-finance-over-purchase-of-asset, http://www.globalbx.com/a_Lease-Financing-For-Businesses.asp

4. A hire purchase agreement: Definition – 19th February 2010, Viewed on 29th October, http://www.scribd.com/doc/27126810/Sources-of-Finance

24 May 2012, Viewed on 29th October, http://www.citizensinformation.ie/en/money_and_tax/personal_finance/loans_and_credit/hire_purchase.html

Advantages & Disadvantages – 19th February 2010, Viewed on 29th October, http://www.scribd.com/doc/27126810/Sources-of-Finance

5. The formation of partnership: Definition – bum_24, Viewed on 3rd November, http://www.scribd.com/doc/8284345/Partnership-Formation-Lecture-NoteS

Sree Rama Rao, 10th February 201, Formation of Partnership, Viewed on 3rd November, http://www.citeman.com/13694-formation-of-partnership.html

Part 2

Osmond Vitez, Demand Media, Qualitative Characteristics of Information, Viewed on 4th November, http://smallbusiness.chron.com/qualitative-characteristics-accounting-information-3952.html

John Louie Ramos, Feb 1, 2011, Viewed on 4th November, http://suite101.com/article/the-main-qualitative-characteristics-of-financial-statements-a341118

Putra, AUG 8, 2009,Viewed on 4th November, http://accounting-financial-tax.com/2009/08/qualitative-characteristic-of-accounting-information-hierarchy-of-accounting-qualities/

J. David Spiceland, University of Memphis, James F. Sepe, Santa Clara University, Lawrence A. Tomassini, Ohio State University—Columbus, Intermediate Accounting, 4/e, Viewed on 4th November, http://highered.mcgraw-hill.com/sites/0072994029/student_view0/ebook/chapter1/chbody1/qualitative_characteristics_of_accounting_information.html

Steven Bragg, APRIL 3, 2011, Viewed on 4th November, http://www.accountingtools.com/questions-and-answers/what-are-the-qualitative-characteristics-of-financial-statem.html

D. Victor, November 24, 2010, Viewed on 4th November, http://www.helium.com/items/1758567-qualitative-characteristics-of-financial-statements

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