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business
accounting for business

Questions and Answers of Accounting for Business

2 How might a soccer club such as Tottenham Hotspur deal with impairment of its playing staff due to, say, a career-ending injury or a falling out of a player with the club?
1 How would you assess the fair value of a property that you owned? How accurate could you be? How could you convince anyone else that your estimate was reasonable?
2 Suppose that you inherited from a rich relative an allowance of $50,000 a year, starting tomorrow, when your age is 60 (there are fewer years to use in the calculation than if we assumed that you
3 In a 2015 article the idea that ‘fair value’ could be problematical was raised.Once upon a time, values were based on cost, unless assets were no longer worth their cost, in which case they had
4 How objective is accounting? How many instances where judgement is a key element can you identify?
2.1 LO1 What are the main characteristics of assets and liabilities from an accounting perspective? Is this consistent with a non-accounting definition?
2.2 LO5 What is the primary measure used for asset valuation on the statement of financial position? What is the source of this measure and justification for its use?
2.3 LO3 What sort of account is ‘retained earnings’?
2.4 LO3 What sort of account would be included in the intangible asset category?INTERMEDIATE
2.5 LO1/5/7 Provide examples of valuable resources of a business that will not be included as assets on the statement of financial position. Why does this occur?
2.6 LO2 Why is the accounting equation always in balance?
2.7 LO3 Describe the basis used to determine whether an asset is classified as current or non-current. Is the same basis used for the classification of liabilities?
2.8 LO2 Why is the statement of financial position also called a ‘balance sheet’?
2.9 LO5 The prudence convention has significantly influenced financial transactions recording and reporting.(a) What is the prudence convention?
(b) Provide examples of how it has influenced transaction recording and reporting.
2.10 LO3 What other financial measures besides historical cost might be used for asset valuation?
2.11 LO2/5 What is an accounting convention?
2.12 LO2/3 It has been said that all costs (expenditure) become expenses.(a) Do you agree with this statement?
(b) Provide examples to support your position.
2.13 LO2 Distinguish between a ‘legal entity’ and an ‘accounting entity’ in relation to different business types.CHALLENGING
2.14 LO1/5 ‘Human capital’ and ‘intellectual property’ are of significant value in many organisations. Provide arguments for and against their inclusion on the statement of financial position.
2.15 LO1/2/5 Does the use of some sort of ‘current cost’ for statement of financial position valuation increase the usefulness of the statement? Does it cause problems?
2.16 LO1/2/5 An accountant prepared a statement of financial position for a business using the horizontal layout.In this statement, the capital of the owner was shown next to the liabilities. This
2.17 LO5–7 ‘The statement of financial position shows how much a business is worth.’ Do you agree with this statement? Discuss.
2.18 LO6 The statement of financial position can be used to assess the following aspects of the reporting entity:• liquidity• asset mix• financial structure (solvency).(a) What do these terms
(b) How could they be assessed from the statement of financial position figures?
(c) Which external stakeholders would have a particular interest in each aspect?
2.2 LO1–4 (a) Martin Russell opened his consulting business as a proprietary company on 1 November. An aggressive marketing campaign and an expansive network of friends from university resulted in
2.4 LO2 For each of the following transactions identify the effect on the balance sheet equation?Transaction A L 0E 1 The owner ‘Bill’ contributes cash to the business, Bills Electrical Services
2.5 LO2 Complete the table by inserting the missing figures.(a) (b) (c) (d)Current assets 13,900 18,300 13,200 ?Non-current assets 51,600 71,600 110,700 69,600 Current liabilities 14,200 11,900 9,600
2.6 LO5 Recognition and measurement of assets are influenced by a number of accounting principles, conventions and assumptions. For each of the following such items, provide an example of how it
2.7 LO2/4 The following is a list of assets and claims of a manufacturing business at a particular point in time:$Bank overdraft 22,000 Freehold land and buildings 245,000 Inventory of raw materials
2.14 LO2 You are provided with the following statement of financial position at the start of the week and the seven transactions for the week.Complete the table to show how each transaction affected
2.15 LO2/4 On 1 March 2017 Joe Conday started a new business. During March he carried out the following transactions:March 1 Deposited $20,000 in a bank account.2 Purchased fixtures and fittings for
(b) Show how the statement of financial position you have prepared as at 6 March 2017 would be presented in the vertical format.
2.16 LO1–3 For each of the following transactions determine:(a) Should an asset be recognised?(b) If yes, what would it be called?(c) If no, why is no asset recognised?Transaction Yes—asset name
2.17 LO2 Identify the errors and prepare a classified statement of financial position to reveal account balance errors.Assets $ Liabilities and shareholders’ equity $Current assets Current
2.18 LO2/4 You are presented with the following statement of financial position which is an incorrect draft.Assuming the accounts and amounts are correct, prepare the statement of financial position
2.19 LO6 Provide a report based on your evaluation of the following three statements of financial position in terms of:(a) liquidity(b) solvency(c) asset mix.A $’000 B $’000 C $’000 Current
2.20 LO2/5 The asset accounts of Out and Down Ltd have been evaluated and the following values determined:Asset Initial cost Residual cost Replacement price Net realisable value Present value
1 Do you agree that the statement of financial position provides a summary of the assets and liabilities of the business? What kind of omissions can you think of? What limitations does the statement
2 How useful is this summary in terms of making economic decisions?
3 The snapshot analogy is a good one, but what are the limitations of an approach of this type?
4 How does the statement of financial position help in assessing the financial health of a business?
5 Can you think of any reasons why the figure shown under equity in a statement of financial position could be misleading?
6 What do you think about the use of debt in a business? Why and when might the use of debt be appropriate?
7 Why might the absence of debt in a business be seen as displaying a sound financial approach?
8 What do you think were the main issues arising from the global financial crisis and how have they impacted on the levels of debt deemed to be acceptable or appropriate?
9 How important might financial flexibility be to a business?
10 Explain the terms ‘current’ and ‘non-current’. Why do you think current and non-current items are separately classified? How might this distinction help you in assessing the
11 What can you learn from the statement of financial position about liquidity within the business?How might you decide what level of liquidity is appropriate?
12 How does the statement of financial position help in assessing the risk inherent in the business?
LO1 Explain the nature and purpose of a statement of financial performance, usually referred to as an income statement, and its relationship with the statement of financial position
LO2 Understand the layout of a typical statement of financial performance, and describe its component parts
LO3 Demonstrate an understanding of income and expenses in relation to definition, recognition, classification and measurement
LO4 Explain the concept of depreciation and its impact on the financial statements
LO5 Identify the main issues relating to inventory in the context of the income statement and the statement of financial position
LO6 Identify the main issues regarding receivables in terms of revenue and expense recognition, and explain their impact on the income statement and the statement of financial position
LO7 Use a first-principles approach to build up a simple set of final accounts, i.e.statement of financial position and income statement
LO8 Review and interpret the income statement.
1 How might the issue regarding the principles of revenue recognition in this case have been addressed and possibly avoided?
2 Is this a case of buyer beware?
3 What are your thoughts on the question raised above—’why, if there was jiggery-pokery at autonomy, it went unnoticed for so long by so many’? Should this have been at least commented on by
4 From a variety of web sources, obtain an understanding of the ways in which the accounting practices might have been deemed fraudulent by HP. What are your opinions on the various practices you
1 Explain why you think Harvey Norman’s lay-by policy is what it is.
2 Discuss Boral’s recognition criteria for land development projects, specifically whether you think that recognition should occur on a contract exchange.
3 What kind of measurement difficulties do you think Boral might have in terms of its recognition criteria relating to long-term contracts?
1 Discuss Boral’s indicators of receivable impairment. Can you think of any other indicators.
2 Boral includes inventories and work-in-progress at the lower of cost (including materials, labour and appropriate overheads) and net realisable value. What overheads might be appropriate?
3 Comment on the various policies set out in Real World 3.3.
1 What do you understand by negative gearing?
2 What are the current rules regarding superannuation contributions and benefits?
3 Can you identify reasons why you might feel the need to engage in tax planning?
4 If you were considering setting up a business, which taxation factors might influence your decision to use either a sole partnership or a company?
3.1 LO1/2 What is the major connection between the statements of financial position and performance?
3.2 LO4 Discuss depreciation in the context of the various accounting concepts.
3.3 LO5 Discuss the write-down of inventory to the lower of cost and net realisable value in the context of the various accounting concepts.
3.4 LO3 For accounting and financial reporting, what does it mean to say that an item of income or expense is ‘material’?
3.5 LO2/3 Provide three examples each of (a) non-operating income and (b) operating revenues. Exact classification will depend on the individual business and the nature of its operations.INTERMEDIATE
3.6 LO1 Company Xcel Ltd announces an increase of 10% in net profit for the year to $1,700,000. As a potential investor in the company:(a) What does this announcement tell you?
(b) What other information do you require for deciding whether or not to invest in the company?
3.7 LO6 Discuss the provision for doubtful debts in the context of the various accounting concepts.
3.8 LO8 What evidence would suggest that income statement review and analysis is considered a useful exercise? To what end are such reviews conducted?
3.9 LO3 When should income be recognised in the following situations:(a) a long-term construction project?(b) investment in a new-growth forest?(c) wine held in storage for selective ageing?(d)
3.10 LO3/4 It has been said that ‘all costs become expenses’.(a) Distinguish between ‘costs’ and ‘expenses’.
(b) Do you agree with this statement? Why/why not?
3.11 LO2/3 ‘Although the statement of financial performance is a record of past achievement, the calculations required for certain expenses involve estimates of the future.’ What is meant by this
3.12 LO5 You have read that FIFO is the preferred method of inventory valuation because the cost flows match the physical flows of goods, and inventories are recorded at current costs.(a) Do you
(b) Provide a case to support the use of LIFO.
3.13 LO3 A retailer will normally calculate ‘gross profit’.(a) What is gross profit?(b) How is it related to ‘mark-up’?(c) Why is it such an important measure?
3.14 LO6 Accounting transactions can be recognised on a ‘cash’ or an ‘accrual’ basis.(a) Explain these two terms.(b) Why have government bodies and councils moved in recent years from a
3.15 LO 1–6 In terms of expenses, in this chapter you have specifically reviewed:(a) depreciation of property, plant and equipment(b) cost of goods sold and inventory valuation(c) bad and doubtful
3.16 LO3 When should income or revenue be recognised as being earned and recorded in the accounts?Discuss and provide examples of different types of income and revenue where the recognition date is
3.17 LO4 Critically examine the following statements about depreciation:(a) Depreciation is a valuation adjustment.(b) Depreciation equals physical wear and tear.(c) Depreciation provides funds for
3.18 LO3 Profit after tax for the period was $70,000, but the net assets increased by $180,000. What might explain the discrepancy between the two figures?
3.19 LO3/4 For ‘property, plant and equipment’, the following expenses can be observed in the income statement or attached notes:• depreciation of equipment• write-down of equipment to fair
(b) Identify an accounting principle that is closely linked with each of these expenses.
3.20 LO3 Revenue can be recognised at different points in the discovery/extraction/production/sales cycle.(a) How does the decision on which point is selected affect performance?
(b) How does the ‘realisation convention’ of accounting assist in the decision process?
(c) Identify situations where income could be recognised earlier in the cycle and also where it should not be recognised until later in the cycle.new truck for his cattle and hay hauling

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