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advanced financial accounting
Questions and Answers of
Advanced Financial Accounting
Forfar plc is an innovative engineering company with a substantial research and development budget. It is company policy to capitalise all expenditure relevant to development work wherever possible
Amesbury plc produces and distributes computer-controlled machinery. As accountant for the company, you have been provided with the following information regarding the company’s activities in
Global plc, which prepares accounts to 31 January each year, operates in several different countries and has recently obtained government financial assistance both in the UK and abroad:(1) A foreign
Provisions are particular kinds of liabilities. It therefore follows that provisions should be recognised when the definition of a liability has been met. The key requirement of a liability is a
FRS 12 – Provisions, contingent liabilities and contingent assets was issued in September 1998.Prior to its publication, there was no UK Accounting Standard that dealt with the general subject of
FRS 12 – Provisions, Contingent Liabilities and Contingent Assets requires contingencies to be classified as remote, possible, probable and virtually certain. Each of these categories should then
L plc sells gaming cards to retailers, who then resell them to the general public. Customers who buy these cards scratch off a panel to reveal whether they have won a cash prize. There are several
(a) Explain the main reasons for the introduction of FRS 4, Capital instruments. (7 marks)(b) Explain how FRS 4, Capital instruments, deals with the accounting treatment of:(i) convertible debt;
You are the management accountant of Short plc. On 1 October 1993 Short plc issued 10 million £1 preference shares at par, incurring issue costs of £100 000. The dividend payable on the preference
Your managing director has recently read an article which referred to Financial Reporting Standard 4 (FRS 4) – Capital instruments. He has requested a report from you about FRS 4.Requirement Write
Tealing plc requires advice on the appropriate accounting treatment for the following transactions in capital instruments in the year ended 30 November 2002.(1) The company issued convertible debt on
% for the remaining years.Assume that the effective rate of interest is 10.33% per annum.(2) 250 000 5% redeemable £1 preference shares were issued on 1 June 2002. Dividends are paid annually
Standard setters have been struggling for several years with the practical issues of the disclosure, recognition and measurement of financial instruments. The ASB has issued a Discussion Paper on
One of the issues dealt with by the Accounting Standards Board in its Statement of Principles for Financial Reporting is the measurement of assets and liabilities in financial statements.The
The objective of FRS 5 – Reporting the substance of transactions, is to ensure that a reporting entity’s financial statements report the substance of the transactions into which it has
You are the management accountant of Tree plc, a listed company that prepares consolidated financial statements. Your Managing Director, who is not an accountant, has recently attended a seminar at
Financial Reporting Standard 5 Reporting the Substance of Transactions requires an entity’s financial statements to report the substance of transactions into which it has entered. The FRS sets out
FRS 5 – Reporting the Substance of Transactions – requires that a reporting entity’s financial statements should report the substance of the transactions into which it has entered. FRS 5 states
FRS 5 – Reporting the Substance of Transactions – requires that a reporting entity’s financial statements should report the substance of the transactions into which it has entered.You are the
You are the management accountant of Prompt plc, a UK company which prepares financial statements to 31 March each year. The financial statements for the year ended 31 March 1998 are due to be
S plc is a large manufacturing company. The company needs to purchase a major piece of equipment which is vital to the production process. S plc does not have sufficient cash available to buy this
You are the financial director of Pilgrim plc, a listed company. Your new group managing director, appointed from one of Pilgrim plc’s overseas subsidiaries, is reviewing the principal accounting
Flow Ltd prepares financial statements to 31 March each year. On 1 April 1998, Flow Ltd sold a freehold property to another company, River plc. Flow Ltd had purchased the property for £500 000 on 1
Leese, a public limited company and a subsidiary of an American holding company operates its business in the services sector. It currently uses operating leases to partly finance its usage of land
Accounting for leases has been a problematical issue for some years. In 1984, SSAP 21, –Leases and hire purchase contracts was issued. This Accounting Standard requires that lessee companies
Using the information from Exercise E5.1 prepare a statement of cash flows for Candyfloss for the first six months of the year 2010, using the indirect method. data Exercise E5.1Candice-Marie James
The summarised income statement for the years ended 31 March 2009 and 2010 and balance sheets as at 31 March 2009 and 31 March 2010 for Boxer plc are shown below:Required:(i) Calculate the following
Refer to note 1 in Johnson Matthey Plc’s notes on the accounts in their annual report and accounts 2011 and identify the geographical analysis by origin for 2011 and 2010 for:(a) total revenue(b)
The notes and five-year income statement extracts from the financial statements of an alcoholic drinks group are shown below.Notes:■ The group sells alcohol-based products to consumers and operates
Normal plc pays £20,000 a year interest on an irredeemable debenture, which has a nominal value of £200,000 and a market value of £160,000. The rate of corporation tax is 30%. You are required
Lucky Jim plc has the opportunity to manufacture a particular type of self-tapping screw, for a client company, that would become indispensable in a particular niche market in the engineering field.
You are required to compute the MVA for 2009, 2010, and 2011 from the estimated information for a supermarket group. 2011 2010 2009 Number of shares 6.823m 6.823m 6.776m Share price 261p 169p 177p
David (Dai) Etcoak decided to set up a drinks wholesale business, Etcoakco, on 1 December 2009. He had £100,000 available to invest, which is the amount he felt was required to set up the business.
William Mason is the managing director of Classical Gas plc, a recently formed manufacturing company in the chemical industry, and he has asked you as finance director to prepare a report that covers
Extracts from the ledgers of Hall Ltd have provided the following information for 2009 and 2010. Sales revenue 2009 Sales revenue 2010 Purchases 2009 Purchases 2010 Expenses 2009 Expenses 2010
(a) Explain why there are always problems at the year-end in the assessment of the costs associated with electricity, gas, and telephone.(b) Using the information below, prepare the appropriate
Arthur Moment set up a table-making business, Forlegco, on 1 July 2010. He had £10,000 available to invest, which is the amount he estimated was required for setting up costs. In the first month of
From the trial balance for Forlegco for 31 July 2010 (Exercise E2.3)(i) Prepare a simple income statement for July 2010.(ii) Has Forlegco made a profit in July?(iii) If Forlegco has not made a
From the trial balance for Forlegco for 31 July 2010 (Exercise E2.3) prepare a simple statement of cash flows for July 2010. DATA (Exercise E2.3)Arthur Moment set up a table-making business,
You are required to prepare the appropriate correcting entries in a company’s accounts at 31 December 2010 for the following: (i) A cheque paid for rent amounting to 2,400 has been entered into the
Consider two ways of looking at the profit of a business: an increase in the book wealth of the company; and the net result of the company’s trading operations (revenue less expenses). What do
Explain the format and structure of the balance sheet of a typical limited company.
Explain what assets, liabilities, and shareholders’ equity are, and give some examples of the items included in each of these categories.
(i) What accounting convention is generally used in the valuation of non-current assets?(ii) What additional costs may sometimes be included within non-current assets costs and to which assets may
Why are current assets and non-current assets shown under different balance sheet classifications?
What factors influence the accurate valuation of a company’s trade receivables?
Why should a potential investor exercise caution when analyzing the balance sheets of potential companies in which to invest?
‘Surely the purchase of non-current assets is expenditure just like spending on stationery or photocopy expenses so why should it appear as an entry in the balance sheet?’ Discuss.
‘It has often been said that the value of every item in a balance sheet is a matter of opinion and the cash and bank balances are the only numbers that can truly be relied upon.’ Discuss.
Mr IM Green – Manager Ian admired the sign on the door to his new offi ce, following his appointment as manager of the human resources department. The previous manager left fairly suddenly to join
The balances in the accounts of Vertico Ltd at 31 July 2010 are as follows:(i) An important number has been omitted. What is that?(ii) Using the data provided and the missing data prepare a balance
You are required to prepare a balance sheet for Trainer plc as at 31 December 2010 using the trial balance at 31 December 2010 and the additional information shown on the next page.Additional
The following information relates to Major plc at 31 December 2010 and the comparative numbers at 31 December 2009.Prepare a balance sheet in the format adopted by most of the leading UK plcs showing
From the trial balance of Gremlins plc on 31 March 2010 identify the assets and expenses (debit balances) and income, liabilities, and equity (credit balances). Confirm that the trial balance is in
Prepare a balance sheet as at 31 December 2010 for Gorban Ltd based on the following trial balance, and the further information shown below.You are given the following additional information, which
You are required to prepare a balance sheet as at 31 December 2010 from the following summary of Pip Ltd’s fi nancial position at 31 December 2010. Brands worth 10,000 (directors' opinion)
How would you define the profit (or loss) earned by a business during an accounting period?
Outline an income statement showing each of the main category headings using the business functions format.
(i) Which accounting or financial reporting standard contains provisions relating to the format of the income statement?(ii) What are the requirements that are relevant to the formats of the income
The income statement and the balance sheet report on diff erent aspects of a company’s fi nancial status. What are these diff erent aspects and how are they related?
(i) Why are the methods used for the valuation of the various types of assets so important?(ii) Describe the three main categories of asset that are most relevant to asset valuation.
What is depreciation and what are the problems encountered in dealing with the depreciation of non-current assets?
How does the valuation of trade receivables impact on the income statement of a business?
Profit does not equal cash, but how can the one be reconciled with the other for a specific accounting period?
‘My profit for the year is the total of my pile of sales invoices less the cash I have paid out during the year.’ Discuss.
‘The reason why companies make a provision for depreciation of their non-current assets is to save up enough money to buy new ones when the old assets reach the end of their lives.’ Discuss.
Why is judgement so important in considering the most appropriate method to use for valuing inventories? What are the factors that should be borne in mind and what are the pros and cons of the
Mr Kumar’s chemist shop derives income from both retail sales and prescription charges made to the NHS and customers. For the last two years 31 December 2009 and 31 December 2010, his results were
Discuss the concepts that may apply and practical problems that may be encountered when accounting for:(i) the acquisition of desktop personal computers, and(ii) popular brands of products supplied
A friend of yours owns a shop selling CDs and posters for the 12- to 14-year-old market.From the following information advise him on the potential problems that may be encountered in the valuation of
The Partex company began trading in 2008, and all sales are made to customers on credit. The company is in a sector that suffers from a high level of bad debts, and a provision for doubtful debts of
Tartantrips Ltd, a company in Scotland, operates several ferries and has a policy of holding several in reserve, due to the weather patterns and conditions of various contracts with local
The following financial information that has been provided by Lazydays Ltd, for the year ended 31 March 2010 (and the corresponding numbers for the year to 31 March 2009), construct an income
A lorry was purchased for £45,000 on 1 January 2010 and was expected to last for five years after which it was estimated that it could be sold for £8,000 The company uses the straight-line method
From the trial balance of Retepmal Ltd on 31 March 2010 shown below prepare an income statement for the year to 31 March 2010 and a balance sheet as of 31 March 2010 using the formats used by most UK
(i) How would you define cash generated by a business during an accounting period?(ii) Which International Accounting Standard (IAS) deals with cash flow?
Give an example of the supporting analyses and notes that are prepared in support of the main statement of cash flows.
Describe the ways in which both the direct method and the indirect method may be used by a business to derive cash generated from operations during an accounting period.
(i) Which cash analysis is used to link the statement of cash fl ows to the income statement?(ii) How does it do that?
(i) Which cash analysis is used to link the statement of cash fl ows to the balance sheet?(ii) What are the links?
Why is cash so important, compared to the other assets used within a business?
(i) What questions does the statement of cash fl ows aim to answer?(ii) How far does it go towards answering them?
Why is the information disclosed in the income statement and the balance sheet not considered suffi cient for users of fi nancial information? What is so important about cash fl ow that it has an
‘Forget your income statements and balance sheets, at the end of the day it’s the business’s healthy bank balance that is the measure of its increase in wealth.’ Discuss.
Candice-Marie James and Flossie Graham obtained a one-year lease on a small shop which cost them £15,000 for the year 2010, and in addition agreed to pay rent of £4,000 per year payable one year in
Jeffrey Packaging plc has used the following information in the preparation of its financial statements for the year ended 31 March 2010.You are required to prepare a cash generated from operations
From the income statement for the year ended 31 December 2010 and balance sheets as at 31 December 2009 and 31 December 2010, and the additional information shown below, prepare a statement of cash
Llareggyb Ltd started business on 1 January 2010 and its year ended 31 December 2010. Llareggyb entered into the following transactions during the year.Received funds for share capital of £25,000
The balance sheets for Victoria plc as at 30 June 2009 and 30 June 2010 are shown below:The following information is also relevant:1. During the years 2009 and 2010 Victoria plc disposed of no
Sparklers plc have completed the preparation of their income statement for the year ended 31 October 2010 and their balance sheet as at 31 October 2010. During the year Sparklers sold some
Dimarian plc’s income statement for the year ended 31 December 2010, and its balance sheets as at 31 December 2010 and 2009, are shown below. Dimarian plc issued no new ordinary shares during the
(i) Which areas of the business do auditors’ opinions cover?(ii) What happens if there is any fundamental uncertainty as to compliance?
Explain the implications of the ‘expectation gap’ with regard to external auditors.
Explain the obligations of directors of limited companies in terms of their duty of care, their fi duciary duty, and the Corporate Manslaughter and Corporate Homicide Act (2007).
If the severity of the penalty is determined by the seriousness of the offence, describe the half dozen or so most serious offenses under the Company Directors (Disqualification) Act 1986 (as amended
Outline the general responsibilities of a director of a limited company with regard to the company, its shareholders and other stakeholders.
What are the key actions that a director of a limited company may take to ensure compliance with his or her obligations and responsibilities?
Discuss, and illustrate with some examples, how far you think the UK Corporate Governance Code goes to preventing the kind of corporate excesses we have seen in the recent past.
‘I pay my auditors a fortune in audit fees. I look upon this almost as another insurance premium to make sure that I’m protected against every kind of fi nancial risk.’ Discuss.
‘Everyone who embarks on a career in industry or commerce aspires to become a director of their organisation, because then all their troubles are over! Directors just make a few decisions, swan
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