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Question 22 (8 marks) (a) Outline ONE ethical issue related to the preparation of financial reports - HSC - SSCE Business Studies - Question 22 - 2019 - Paper 1
Question 22
Question 22 (8 marks) (a) Outline ONE ethical issue related to the preparation of financial reports. (b) Explain ONE advantage of debt financing. (c) Explain ONE ... show full transcript
Worked Solution & Example Answer:Question 22 (8 marks) (a) Outline ONE ethical issue related to the preparation of financial reports - HSC - SSCE Business Studies - Question 22 - 2019 - Paper 1
Step 1
Outline ONE ethical issue related to the preparation of financial reports.
Answer
An ethical issue related to the preparation of financial reports may be that businesses overestimate their revenue and understate their expenditure to give a false impression of their profitability. This false impression gives an inaccurate picture and may encourage investors to invest in a business which appears to be in a stronger financial position than it actually is.
Step 2
Explain ONE advantage of debt financing.
Answer
Debt financing can provide advantages to a business. One significant advantage is that interest, fees, and charges are tax-deductible as they are considered expenses of the business. By using debt financing, the business pays less tax, which may lead to greater profits.
Step 3
Explain ONE disadvantage of equity financing.
Answer
A disadvantage associated with using equity financing is that businesses may lose owner's equity, which is essential to retain for key business functions. Due to this, if they are unable to claim equity investors' returns as expenses, it may result in a lower profitability than expected. Additionally, this may prevent the business from being able to invest in other opportunities, which reduces potential growth.