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accounting and finance for non specialists

Questions and Answers of Accounting And Finance For Non Specialists

12.3 What are the reasons for holding inventories? Are these reasons different from the reasons for holding cash?
12.2 How might each of the following affect the level of inventories held by a business?(a) An increase in the number of production bottlenecks experienced by the business.(b) A rise in the
12.1 Tariq is the credit manager of Heltex plc. He is concerned that the pattern of monthly cash receipts from credit sales shows that credit collection is poor compared with budget. Heltex’s sales
Why might a supplier prefer a customer to take a period of credit, rather than pay for the goods or services on delivery? (There are probably two reasons.)1 Paying on delivery may not be
Assume that Freezequick Ltd (Activity 12.14) wishes to reduce its OCC by 30 days. Evaluate each of the options available to this business.
Superlec plc makes electrical appliances. One of its major component suppliers is Technicalities Ltd. The two businesses have recently established a comprehensive JIT relationship.Would you expect
Petrov plc sells 10,000 tonnes of sand each year and demand is constant over time.The purchase cost of each tonne is £15 and the cost of placing and handling an order is estimated to be £32. The
Assume the same facts as in Activity 12.4. However, we are also told that the business maintains buffer inventories of 300 units. At what level should the business reorder?
What kinds of changes in the business environment might lead to altering the level of investment in working capital? Try to identify at least two changes that could affect the working capital needs
6.4 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:Dividends were paid on ordinary
6.5 The financial statements for Harridges plc are given below for the two years ended 31 December for each of the last two years. Harridges plc operates a large chain of retail stores.Dividends were
Assume that the decision did not concern a choice between two models of lorry but rather whether to operate an additional lorry or not. Would this make a difference to the view taken concerning the
Assume exactly the same circumstances as in Activity 7.4, except that the garage is busy at the moment. If a mechanic undertakes the engine-replacement job, it will mean that other work the mechanic
In Real World 7.2, we saw that Ryanair’s break-even point varied from one year to the next. Why wasn’t it exactly the same each year?
Cottage Industries Ltd (see Example 7.1) expects to sell 500 baskets a month. The business has the opportunity to rent a basket-making machine. Doing so would increase the total fixed cost of
We have just seen that, in practice, relationships between costs, revenues and volumes of activity are not necessarily straight-line ones.Can you think of at least two reasons, with examples, why
Ali plc owns a workshop from which it provides a PC repair and maintenance service.There has recently been a downturn in demand for the service. It would be possible for Ali plc to carry on the
Cottage Industries Ltd (see Example 7.1, page 000) has spare capacity in that its basket makers have some spare time. An overseas retail chain has offered the business an order for 300 baskets at a
Going back to Activity 7.17, 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 or
Shah Ltd needs a component for one of its products. It can subcontract production of the component to another business that will provide the components for £20 each. Shah Ltd can produce the
Now assume that Shah Ltd (Activity 7.20) has no spare capacity, so it can only produce the component internally by reducing its output of another of its products. While it is making each component,
What factors, other than the immediately financially quantifiable, would you consider when making a make-or-buy decision?We feel that there are two major factors:1 General problems of subcontracting.
In considering Goodsports Ltd (in Example 7.3), we saw that the general clothes department should not be closed ‘without any other developments’.What ‘other developments’ could affect this
7.2 What is meant by the BEP for an activity? How is the BEP calculated? Why is it useful to know the BEP?
■ explain the role and nature of activity-based costing.
A garage owner wishes to know the direct cost of each job (car repair) that is carried out.How could the direct cost (labour and materials) information concerning a particular job be collected?
Into which category, direct or indirect, would each of the elements of cost listed in Activity 8.4 fall, if we were seeking to find the cost of operating the entire business of Sparky Ltd for a month?
Suppose that Marine Suppliers Ltd (see Activity 8.8) used a machine hour basis of charging overheads to jobs. What would be the cost of the particular job if it was expected to take 5 machine hours
The point has just been made that it would normally be irrational to prefer one basis of charging overheads to jobs simply because it apportions either a higher or a lower amount of overheads to a
Taking the same business as in Example 8.2 (page 000), on closer analysis we find that of the overheads totalling £20,000 next month, £8,000 relate to machines (depreciation, maintenance, rent of
8.1 What problem does the existence of work in progress cause in process costing?
8.3 Are direct cost and variable cost the same thing? Explain your answer.
8.1 Distinguish between■ job costing;■ process costing; and■ batch costing.Fully explain each approach.
8.3 Athena Ltd is an engineering business doing work for its customers to their particular requirements and specifications. It determines the full cost of each job taking a ‘job costing’
8.4 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
Vierra Popova Ltd (Example 9.1) now wishes to prepare its cash budget for the second six months of the year. The budgeted income statements for each month of the second half of the year are as
Have a go at preparing the trade receivables budget for Vierra Popova Ltd for the six months from July to December (see Activity 9.7 and Example 9.2). The trade receivables budget for the six months
ARR suffers from a major defect as a means of assessing investment opportunities.Can you reason out what this is? Consider the three competing projects whose profits are shown below. All three
In what respect is PP not a complete answer as a means of assessing investment opportunities?Consider the cash flows arising from three competing projects:(Hint: Again, the defect is not concerned
The directors of Manuff (Steel) Ltd are considering closing one of the business’s factories.There has been a reduction in the demand for the products made at the factory in recent years. The
10.5 The accountant of your business has recently been taken ill through overwork. In his absence, his assistant has prepared some calculations of the profitability of a project, which are to be
Trader Ltd is a wholesaler of imported washing machines. The business is partly funded by a bank overdraft and the bank is putting pressure on Trader Ltd to reduce this as soon as possible.Sales
11.3 Devonian plc has the following equity as at 30 November Year 4:In the year to 30 November Year 4, the operating profit (profit before interest and taxation)was £40 million and it is expected
11.5 Gainsborough Fashions Ltd operates a chain of fashion shops. In recent months the business has been under pressure from its suppliers to reduce the average credit period taken from three months
11.2 H. Brown (Portsmouth) Ltd produces a range of central heating systems for sale to builders’ merchants. As a result of increasing demand for the business’s products, the directors have
11.4 Distinguish between invoice discounting and factoring.
11.3 Distinguish between an offer for sale and a public issue of shares.
11.2 Why might a business that has a Stock Exchange listing revert to being unlisted?
11.1 What are the potential disadvantages of raising finance through a sale-and-leaseback arrangement?
Given that a £40 million operating profit is the most likely, what advice would you give the shareholders as to the better financing option?
What do you notice about the earnings per share (EPS) values for each of the two financing options, in the light of different possible operating profits?
■ discuss the ways in which smaller businesses may raise finance.
10.4 Why are cash flows rather than profit flows used in the IRR, NPV and PP methods of investment appraisal?
10.1 Why is the net present value method of investment appraisal considered to be theoretically superior to other methods that are found in practice?
We know that Billingsgate Battery Company could alternatively invest its money at a rate of 20 per cent a year. How much do you judge the present (immediate) value of the expected first year receipt
■ Identify and evaluate the four main investment appraisal methods found in practice.
9.3 What is meant by a variance? What is the point in analysing variances?
9.2 What were the five uses of budgets that were identified in the chapter?
9.1 Define a budget. How is a budget different from a forecast?
If you were the chief executive of Baxter Ltd, what attitude would you take to the overall variance between the budgeted profit and the actual one?How would you react to the five individual variances
The fourth point on the list of the uses of budgets (control) implies that current management performance is compared with some yardstick. What is wrong with comparing actual performance with past
The third point on the list of the uses of budgets (motivation) implies that managers are set stated tasks. Do you think there is a danger that requiring managers to work towards such predetermined
6.4 In the chapter it was mentioned that ratios help to eliminate some of the problems of comparing businesses of different sizes. Does this mean that size is irrelevant when interpreting and
6.3 Two businesses operate in the same industry. One has an inventories turnover period that is longer than the industry average. The other has an inventories turnover period that is shorter than the
6.2 What potential problems arise particularly for the external analyst from the use of statement of financial position figures in the calculation of financial ratios?
6.1 Some businesses operate on a low operating profit margin (for example, a supermarket chain). Does this mean that the return on capital employed from the business will also be low?
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
Can you think of any bases that could be used to compare a ratio that you have calculated from the financial statements of your business for a particular period? (Hint: There are three main
■ explain the significance of the ratios calculated;
Look back to Example 3.1 and assume that a trainee accountant prepared the income statement. Subsequent checking by the chief financial officer revealed the following errors:1 Staff performance
A manufacturing business sells goods on credit. Below are four points in the production/selling cycle at which revenue might be recognised:1. when the goods are produced;2. when an order is received
Why might leaving revenue recognition until the contract is complete lead to a misleading impression?
How will the eventual payment of the outstanding sales commission (Example 3.4) and the electricity bill for the last quarter (Example 3.5) be dealt with in the accounting records of Domestic Ltd?
Assume that the machine used in Example 3.7 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
What judgements must be made to calculate a depreciation expense for a period?You should have thought of the following:■ the expected residual or disposal value of the asset;■ the expected useful
Suppose that the 9,000 tonnes of inventories in Example 3.8 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
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
The treatment of bad debts represents a further example where judgement is needed to derive an appropriate expense figure. What will be the effect of different judgements concerning the appropriate
3.2 ‘Depreciation is a process of allocation and not valuation.’ What do you think is meant by this statement?
3.4 ‘An asset is similar to an expense.’ Do you agree? Explain your answer.
3.3 Fill in the values (a) to (f) in the following table on the assumption that there were no opening balances involved. Relating to period At end of period Paid/received Expense/revenue Prepaid
3.4 The following is the statement of financial position of TT and Co. (see Self-assessment question 3.1 on page 107) at the end of its first year of trading:During 2016, the following transactions
4.3 The following information was extracted from the financial statements of I. Ching( Booksellers) plc for the year to 31 December 2015:Required:Prepare a statement of comprehensive income for the
What might be included as cash inflows from financial investments?
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?
The relevant information from the financial statements of Pluto plc for last year is as follows:The following further information is available about payments during last year. What figure should
5.2 What is the difference between the direct and indirect methods of deducing cash generated from operations?
5.4 What causes the profit for the reporting period not to equal the net cash inflow?
5.5 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
4.4 Compare the main features of a preference share with those of:(a) an ordinary share; and(b) loan notes.
4.3 What is a reserve? Distinguish between a revenue reserve and a capital reserve.
What do you think are the main qualitative characteristics that information contained in a management commentary should possess? (Hint: Think back to Chapter 1.)
Can you think why shares might be issued at above their nominal value? (Hint: This would not usually happen when a company is first formed and the initial shares are being issued.)
■ describe the main features of the equity in a limited company and the restrictions placed on owners seeking to withdraw part of their equity;
■ discuss the nature and financing of a limited company;
explain why an understanding of accounting and finance is likely to be relevant to your needs.
Who are the users of financial accounting information?
What kinds of financial accounting reports should be prepared and what should they contain?
How should items such as profit and asset values be measured?
1.1 What is the purpose of producing accounting information?

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