Question

Stacy, a longtime friend of yours, has had a passion for baking as long as you've known her. She has recently come into an inheritance, and is investigating the possibility of opening her own bakery. After you inform her that you are taking an accounting class, she asks for your advice on several issues. Draft a letter to Stacy addressing the following issues:

- What form of business organization - proprietorship, partnership, or corporation - do you recommend Stacy use for her business? Discuss the benefits and weaknesses of each form she may consider.

- Will Stacy need accounting information? If yes, what information will she need and why?

- Identify the different financial statements that Stacy will need to prepare for the business, and the purpose of each of the statements.

Answer 1

O H JAUNAJLLLLLLL SOROTAVIVALD Y TI Answer:- * from the Page information - 1 Stacy wants to open a new Backery. So, I am giving Advises. : I think you should use proprietor- -ship as the form of organisation for your business. . » A sole proprietorship, also known as the sole traden, individual entreppership or proprietorship, is a type of enterprise that is owned and run by one person and in which there is no legal distinction between the owner and the business entity. . - The benefits of this area =) A proprietor will have complete of the entire business, this will. facilite quick decisions and freedom ..------ - L

Page 2 w ay. to do business according to their wishes. . 3) Law does not require a propoietorship - to publish its financial accounts on any other such documents to any members of the public. This allows the business a great deal of confidentiality which is sometimes important in the business world. » The owner derives maximum incentive from the business. He does not have to share any of this profits. so the work he puts into the business is completely reciprocated in incentives. = Being your own boss is a great senge of satisfaction and achievement. You are answerable only to yourself and it is a gocat boost to your self-worthos well. I

Page: WYM However it has some of the weaknesses too like a =) one of the biggest limitations of a sole proprietorship is the unlimited liability of the owner of the business fails it can wife out the personal wealth of the owner as well and affect his future business prospects too. =) Another problem is the limited capital a sole proprietor has access to . His own Personal Savings and money he can borrow may not be enough to expand the. business. Banks and financial institutions are also wary lending to proprietorships =) The life cycle of a sole proprietorship is undecided and attached to its owneg.

If the page=4 owner is incapacitated in any way it has a negative effect on the business, and it may even lead to the closure of the business. A sole proprietorship cannot carry on without its proprietor. -) A sole propsictor also has limited managerial ability. He cannot be an expert in all the fields of the business. And limited resources may mean that he cannot even hire competent people to help him out. This may lead to the business suffering from mismanagement and poor decisions. There are some of the other types of organizations as well like,

:- Mal nen chipir page-5 - when two of more persons come together pool their capital and skills and organise a business, it is called Partnership. Partnership grows essentially because of the limitations or dis advardages of proprietorship. This Advantages are:- D) Easy formation - - Portnership is a contractual agreement between the partners to sun an enterprise. Hence, it is relatively easy to foom, legal formalities associated with formation are minimal. Though, the registration of a Partnership is desirable, but not obligator

2) More capital Available - Page 6 We have just seen that sole : proprielooship suffers from the limitation of limited funds. Partnership overcomes this pooblem, to a goeat extent, because now there are more than one person who provide funds to the enterprise. 1. It also increases the borrowing capacity of the firm. C Moreover the lending institutions also perceive dess risk in granting credit to a partnership than to a proprietorship because the risk of loss is spread over a number of partners rather than only one.

3) combined Talent, Judgement & Skill Page 7 . As there are more than one owners in partner ship, all the partners are involved in decision making. Usually, partnes are pooled from different specialised areas to complement each other.. for example, If there are 3 partners, one paathen might be a specialist in production, another in finance and the god one is in markiting. This gives the firm an advantages of collective expertise for taking better decisions. This the old maxim of two heads being better one" aptly applies to partnership. A) Diffusion of Risk - you have just seen that the entire losses are borne by the sole proprietor only but in case of part her ship, the

Page 8 - losses of the firm are shared by all the partners as per their agreed profit- sharing ratios. Thus, the share of loss in case of each partner will be less : than that in case of proprietorship. : 8) Flexibility - 1. Like proprietorship, the partnership business is also flexible. The partners can easily appreciate and quickly.. react to the changing conditions... No gant business organization can stifle so quick and creative responses to new opportunities. 5) Tax Advantage . . Taration rates applicable to Partnership are lower than proprietorship and company forms of business ownership.

U L . . . CA page-9 Disadvantages:- - In spite of above advantages, there are certain drawbacks also associated with the partnership form of business' organization. D Unlimited liability - - In partner frim, the liability of partners is unlimited. Just as in propsietorship, the partners personal assests may be at risk. If the business cannot pay it debts. . 2) Divided Authority - some times the earlier stated maxim of two heads better than one may turn into "too many cooks spoil the broth". Each partner can discharge his responsibilities in his concerned individual area but in case of areas like

formulation for the white TUTTI policy page-to entorprice there are chances for conflicte 1 b/w the partney. Dis agrements blw the Partners enterprice matters have distoried many a partnership. 3) lack of continuity . 1 . Death or with doccil of one partner causes the partnership to come to an end so these remain uncertainity in continuity of partnership. . 1) Risk of omplied Authority Each partner is an agent for the partnership business. Hence, the decission made by him bind all the partners. At times' an incompetent partner may lead the fillim into difficulties. By taking wrong decission. Risk involved in decission taking by one

WIKI Partner partners A Page 11 is to be born by other also. . - Now, god from of organization is body corporate. A corporation is a organization usally a group of people of a company. Austhorized the state to act as a single entity and recognized as such in law for certain purposes Advantages: 1) Limited liability - The liability of shareholders unless and otherwise stated, is limited to the phase value of shares held by them. or guaranty given by them. 2) perpetual existence Deaths, insanity insolventy of share- - holders or directors do not effect the

page-12 company existance. A company has a superat leagle entity with perpetual succession. 3) professional Management - : . In a company business the management is in the hands of directors who are ellected by the shareholders, and are well experienced persons. In order to manize the day to day activities salaried professionals, manageres are appointed this the company business of fears Personal management 4) Expansion potential.- 1 All there is no limit to the maximum number of shareholders in a public limitied expansion of business is easy by issuing new shares and' debuntures,

P اسے 5) Transfesablity of shades - . If the shareholders of the company are displeased with the progress of the business they can sell their shares any time. During all these changes of ownership the business contineous to operate. 6) Diffusion of Risk - All the members is very large. The whole business Risk is divided among the several members of the company. This is an advantage Pesticularly for small investors Disadvantages:- D lack of secoecy: 2 . As per the leagle : provisions a company has to make various statements availabl

- DL - Page 14 to the registers of the company, financial instructions the secrecy of the business comes down. it is further reduced when the company provides it's annual report to the shareholders has the competitors do allo find out the details of all financial data. 2) Restrictions - - compared to proprietorship and partnership - a company has to comply with more - legal requirements, it consumes considerable time and effort. 3) Management mischiefs:- Sometimes the managers and disectors missuse the company resources for there personal benfities. this brings losses to the company and company is closed. W ARS

E 4) Lack of personal interest - Page 15 Corporations also have disadvantages compared to proprietorships and partnerships when it comes to taxation since, the corporation and the stock holders are Consider to be two different legal entities 1. They face the problem of double taxation meaning that the owners are taxed twice. . - Accounting for sole propsietorships does not usually required individuals to maintain superate records for those business and personal assets. The reason is the business can't exist in the obsence of the owner. . some of the financial statements also have to be prepared at the year end and like a

. .. .. WWW page-16 ;) Balance shed. The purpose of the balance sheel is to reveal the finiancial status of a specific point in time. The statement shows what an entity own's and How much it's owes (liabilities) as well as the amount invested in the business fequete i cash flow statement - The purpose of the cash flow statement is to show where an entities cash is being generated and where its cash is being spent (cash outflows) over a specific period of time. 1 in) statement of profit and loss sumisrizes the revenue, costs and expenses incurred during a specific period of time. P&L statement Davides information about whether a company can generate profits by increasing sevenere, reducing costs or both. mer y struggled to write this answer , please give me a positive Vote.