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accounting and finance for non specialists

Questions and Answers of Accounting And Finance For Non Specialists

Plumber and Company has a fleet of motor vans that are used for making deliveries to customers. The owners want to show these vans on the statement of financial position at their current values
What sort of poor decisions may be made as a result of overstating the financial strength of a business?Try to think of at least two.
In Chapter 1 we discussed neutrality as a desirable element of one of the major qualitative characteristics of financial information. Can you remember which one?
What are the two aspects of each of the following transactions?1. Purchasing £1,000 of inventories on credit.2. Owner withdrawing £2,000 in cash for her own use.3. Paying a supplier £1,000 for
Can you identify any of these resources? Try to think of at least two.
Try to identify two non-current assets with a finite useful life that can be classified as:1. Tangible; and2. Intangible.
Can you recall from Chapter2 how a profit, or loss, for a period is shown in the statement of financial position?
The following information relates to the activities of H&S Retailers for the year ended 30 April 2021:Prepare an income statement for the year ended 30 April 2021. Motor vehicle running
Singh Enterprises, which started business on 1 January 2018, has a reporting period to 31 December and uses the straight-line method of depreciation. On 1 January 2018, the business bought a machine
A manufacturer produces and sells a standard product on credit, which is transported to customers using the manufacturer’s delivery vans. Managers believe there are four points in the
Although revenue for providing services is often recognised before the cash is received, there are occasions when it is the other way around: a business will require payment before providing the
Assume that the machine in Example3.7 was owned by a business that made a profit before depreciation of £40,000 for each of the four years in which the asset was held.Calculate the profit for the
Why might output-based methods rather than input-based methods be more suitable to measure progress?
What judgements must be made to calculate a depreciation expense for a period?
Suppose that the 9,000 tonnes of inventories in Example3.8 were sold for £15 a tonne.(a) Calculate the gross profit for the period under each of the three costing assumptions.(b) What do you note
Assume that prices are falling rather than rising. How would your observations concerning the portrayal of financial performance and position be different for the various costing methods?
Can you think of any circumstances where the net realisable value will be lower than the cost of inventories held, even during a period of generally rising prices? Try to think of at least two.
Reporting inventories in the financial statements provides a further example of the need to apply subjective judgement. For the inventories of a retail business, what are the main judgements that are
What would be the effect on the income statement, and on the statement of financial position, of not taking into account the fact that a debt is irrecoverable?
The accounting treatment of irrecoverable debts is a further example where judgement is needed to derive an appropriate expense figure.What will be the effect of different judgements concerning the
Why do we need accounting rules? Can you think of any arguments against the use of accounting rules?
Limited companies can set a limit on the amount of debts that they will meet. They tend to have reserves of cash, as well as share capital and they can use these reserves topay dividends to the
The fact that shareholders can limit their losses to that which they have paid, or have agreed to pay, for their shares, is of great practical importance to potential shareholders.Can you think of
Do you think that the auditors of a company should prepare the financial statements? Why?
The following information was extracted from the financial statements of I. Ching (Book sellers) plc for the year to 31 December 2020:Required:Prepare a statement of comprehensive income for the
Can you think why these restrictions on the withdrawal of equity are imposed?
Presented below is a draft set of financial statements for Chips Limited.The following additional information is available:1. Purchase invoices for goods received on 29 June 2021 amounting to
If, as mentioned earlier, the change in ownership of shares does not directly affect a particular company, why do many public companies seek to have their shares traded on a recognised Stock Exchange?
Rose Limited operates a small chain of retail shops that sells high-quality teas and coffees. Approximately half of sales are on credit. Abbreviated and unaudited financial statements are as
Can you think of a reason why directors pursuing their own interests may be a problem for society as a whole?
Why might this be an important sanction against a non-compliant company?
The initial financial requirement for a new company is £50,000. There are to be two equal shareholders. Would you advise them to issue two shares of £25,000 each? Why?
Can you think why a company might want to make a bonus issue if it has no effect on shareholder wealth? Try to think of at least one reason.
Why are limited companies required to distinguish different parts of their shareholders’ equity, whereas sole proprietorship and partnership businesses are not?
Can you recall the circumstances in which the non-withdrawable part of a company’s equity could be reduced, without contravening the law? This was mentioned earlier in the chapter.
Can you think of a reason why the directors may wish to make a transfer to general reserves from retained earnings?
Would you expect a company to pay all of its revenue reserves as a dividend?
Can you remember this example?
It can be argued that the publication of financial statements is vital to a well-functioning private sector. Why might this be the case? Try to think of at least one reason.
The following financial statements for Blackstone plc are a slightly simplified set of published accounts. Blackstone plc is an engineering business that developed a new range of products in 2016.
You have overheard the following statements:(a) ‘A budget is a forecast of what is expected to happen in a business during the next year.’(b) ‘Monthly budgets must be prepared with a column
Will the garage, in Activity 7.4, seek to sell the car with its reconditioned engine for £4,000?Data from Activity 7.4A garage business has an old car that it bought several months ago. The car
A garage business has an old car that it bought several months ago. The car needs a replacement engine before it can be driven. It is possible to buy a reconditioned engine for £500. This would take
The financial statements for Harridges plc are given below for each of the last two years ended 31 December. Harridges plc operates a large chain of retail stores.Dividends were paid on ordinary
Set out below are ratios relating to three different businesses. Each business operates within a different industrial sector.Required:State, with reasons, which one of the three businesses is:(a) A
What do you think are the main qualitative characteristics that information contained in a management commentary should possess?
We have already come across some IASs and IFRSs in earlier chapters. Try to recall at least two topics where they were mentioned.
The following is a list of business/accounting events. In each case, state the immediate effect (increase, decrease or none) on both profit and cash: 1 Repayment of borrowings 2 Making a profitable
At the end of its reporting period, Zeneb plc’s statement of financial position included the following items:1. A bank deposit account where one month’s notice of withdrawal is required.2.
The following information has been taken from the financial statements of Juno plc for last year and the year before last:Required:What is the figure for cash generated from operations for Juno plc
What might be included as cash inflows from financial investments? Try to think of at least one example.
Torrent plc’s income statement for the year ended 31 December 2020 and the statements of financial position as at 31 December 2019 and 2020 are as follows:During 2020, the business spent £67
What might be included as cash inflows from financing activities? Try to think of at least one example.
Chen plc’s income statements for the years ended 31 December 2019 and 2020 and the statements of financial position as at 31 December 2019 and 2020 are as follows:Included in ‘cost of sales’,
Last year’s statement of cash flows for Angus plc showed a negative cash flow from operating activities. What could be the reason for this and should the business’s management be alarmed by it?
What information contained within the income statement and statement of financial position for a business can help us deduce the cash inflows from sales?
In deriving the cash generated from operations, we add the depreciation expense for the period to the profit before taxation. Does this mean that depreciation is a source of cash?
Why might this be the case? What has been the impact of these changes on the long-term financing of the business?
Both Ali plc and Bhaskar plc operate wholesale electrical stores throughout the UK. The financial statements of each business for the year ended 31 December last year are as follows:Required:For each
Which of one the above category of ratios should be of most value for short-term lenders?
What potential problems arise when interpreting financial ratios based on statement of financial position figures? Why is this a particular problem for external users?
Amsterdam Ltd and Berlin Ltd are both wholesalers serving broadly the same market, but they seem to take a different approach to it according to the following information:Required:Describe what this
Can you think of any benchmarks, or bases, that could be used to compare a ratio that you have calculated from the financial statements of your business for a particular period?
Threads Limited manufactures nuts and bolts, which are sold to industrial users. The abbreviated financial statements for each of the last two years are as follows:Required:(a) Calculate the
What do you deduce from a comparison of the declines in the operating profit and gross profit margin ratios?
What do you deduce from a comparison of the efficiency ratios over the two years?
What do you deduce from these liquidity ratios?
What do you deduce from the investment ratios set out above? Can you offer an explanation why the share price has not fallen as much as it might have done, bearing in mind the much poorer trading
Assume that a business has internally generated goodwill that had been created in earlier years. If this resource were introduced as a non-current asset (with an indefinite life) in the current
How will this affect the profitability ratios mentioned in the chapter?
Cottage Industries Ltd makes baskets. The fixed cost of operating the workshop for a month totals £500. Each basket requires materials that cost £2. The business pays the basket makers £10 for
Khan Ltd can render three different types of service (Alpha, Beta and Gamma) using the same staff. Various estimates for next year have been made as follows:Required:(a) If the business were to
Lombard Ltd has been offered a contract for which there is available production capacity. The contract is for 20,000 identical items, manufactured by an intricate assembly operation, to be produced
Historic cost can never provide a value that is relevant to a decision. Despite this, historic costs are the principal inputs for preparing financial accounting statements (income statements and
You own a motorcar, for which you paid a purchase price of £5,000 – much below the list price – at a recent car auction. You have just been offered £6,000 for this car.What is the cost to you
Assume that the car cost £10,000. Would this alter the relevance of the historic cost?
Assume that the decision did not concern a choice between two models of lorry but rather whether or not to operate an additional lorry. Would this make a difference to the view taken concerning the
Can you give some examples of items of cost that are likely to be fixed for a hairdressing business? Try to think of at least two.
Does fixed cost stay the same irrespective of the volume of output, even where there is a massive rise in that volume? Think in terms of the rent cost for the hairdressing business.
Can you think of some examples of cost elements that are likely to be variable for a hairdressing business?Try to think of at least one.
Can you suggest another cost for a hairdressing business that is likely to be semi-fixed (semi-variable)?
Can you think of reasons why the managers of a business might find it useful to know the BEP of some activity that they are planning to undertake?
What advice would you give Cottage Industries Ltd about renting the machine, on the basis of the values for margin of safety?
What types of business activity are likely to have high operating gearing? (Hint: Cottage Industries Ltd might give you some idea.)
We saw above that, in practice, relationships between costs, revenues and volumes of activity are not necessarily straight-line ones.Can you think of at least three reasons, with examples, why this
What practical steps could be taken that might lead to a higher level of contribution for the business in Activity7.19?Data from Activity 7.19A business makes three different products, the details
Going back to Activity7.19, what is the maximum price that the business concerned would logically be prepared to pay to have the remaining B14s machined by a subcontractor, assuming that no fixed
Fruitjuice Ltd began operations at the beginning of May. It has just one product, a sparkling orange drink that is marketed as ‘Orange Fizz’. During May the business produced 7,300 litres of the
Psilis Ltd makes a product in two qualities, called ‘Basic’ and ‘Super’. The business is able to sell these products at a price that gives a standard profit mark-up of 25 per cent of full
Johnson Ltd provides a personal computer maintenance and repair service. It has overheads of £10,000 each month. Each month 1,000 direct labour hours are worked and charged to cost units (jobs
A business, that provides a service, expects to incur overheads totalling £20,000 next month. The total direct labour time worked is expected to be 1,600 hours and machines are expected to operate
Distinguish between1. Job costing;2. Process costing; and3. Batch costing.Fully explain each approach.
Can you think of industries where process costing may be suitable? Try to think of at least two.
Moleskin Ltd manufactures a range of products used in the building industry. Manufacturing is undertaken using one of two processes: the Alpha Process and the Omega process. All of the products are
Consider this statement:‘In a job costing system, it is necessary to divide up the business into departments. Fixed costs (or overheads) will be collected for each department. Where a particular
A garage owner wishes to know the direct cost of each job (car repair) that is carried out. How might the direct cost (labour and materials) information concerning a particular job be collected?
Comment critically on the following two statements:(a) ‘Activity-based costing is a means of more accurately accounting for direct labour cost.’(b) ‘Activity-based costing cannot really be
Why would this method have little to commend it?
Marine Suppliers Ltd undertakes a range of work, including making sails for small sailing boats on a made-to- measure basis.The business expects the following to arise during the next month: Direct
Can you think of reasons why direct labour hours tend to be regarded as the most logical basis for sharing overheads between cost units? Try to think of at least one.

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