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22 (a) Outline ONE ethical issue related to the preparation of financial reports - HSC - SSCE Business Studies - Question 22 - 2019 - Paper 1
Question 22
22 (a) Outline ONE ethical issue related to the preparation of financial reports. (b) Explain ONE advantage of debt financing. (c) Explain ONE disadvantage of equi... show full transcript
Worked Solution & Example Answer:22 (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 involve the temptation for businesses to misrepresent their financial status. This often occurs when companies overstate their revenues and understate their expenses, providing a distorted view of their profitability. Such practices can mislead investors and stakeholders, giving an inaccurate picture of the company’s financial health, and ultimately leading to financial consequences when the truth is revealed.
Step 2
Explain ONE advantage of debt financing.
Answer
Debt financing can provide a significant advantage as it allows businesses to obtain capital without diluting ownership. One primary benefit is that interest expenses incurred on the debt are typically tax-deductible, which can effectively lower the overall cost of borrowing. This means that while the business repays the loan with interest, it also enjoys tax benefits that can enhance cash flow and provide more funds for reinvestment.
Step 3
Explain ONE disadvantage of equity financing.
Answer
A disadvantage associated with equity financing is the potential loss of control. When a business raises money by issuing equity shares, it often has to share ownership with new investors, which might dilute the original owners’ control over business decisions. Furthermore, equity investors typically expect a return on their investment in the form of dividends or capital gains, which can place additional pressure on the company’s finances compared to debt financing.