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business
accounting for business

Questions and Answers of Accounting for Business

11 Can you afford to purchase the business? Do you need to borrow to fund the purchase?
4 How might increases in home equity influence your dayto-day expenditure? Do such increases justify substantial additional expenditure?
3 Do you agree that unhappiness is associated with reduced saving and higher spending? How might you deal with this?
2 Do you regard willpower as a limited and easily depleted resource or one that is unlimited? Do you reward yourself (possibly with unhealthy rewards) for displays of willpower? When you have had a
1 Can you identify any particular issues that might arise if decisions are made with an emphasis on savings or cost reduction?
2 The research suggests that standard costing is most applicable to manufacturing businesses. Do you agree with this assessment? What characteristics of business do you think would lead to the use of
1 In its simplest form variance analysis can merely require a comparison of budgeted figures for a particular area with actual figures. Should this be regarded as the minimum that any business should
3 What reasons can you think of as to why a small business might not have a formal budgeting process? Do you think that it is likely that some informal process might be used in its place? Is
2 Budgeting seems to be central to most medium or large organisations’ activities. Why do you think this is so?
1 At a personal level, do you use any kind of regular budgeting process of any sort, or are you happy to use a seat-of-the-pants approach to your personal finances?
Do you think that requiring managers to work towards predetermined targets might stifle their skill, flair or enthusiasm? Explain.
(b) Why is it crucial for those responsible for the budget-setting process to have real authority in the organisation?
(a) Why do you think that most businesses prepare detailed budgets for the forthcoming year?
2 In an article by Charlie Wells, entitled ‘Why you keep busting your budget’, which appeared in The Wall Street Journal on 9 November 2015, the question was raised as to how you can get your
1 How would you approach the planning of a world trip? What are the critical financial factors that you would take into account? How would you approach the difficult job of choosing between what you
4 A key finding of the research was that the most accurate forecasters were able to use the estimates to underpin performance management and strategic decisions. Do you think this is the case?
3 What role do you think technology can play in improving forecasting? With developments in computerised accounting systems, do you expect substantial increases in the number of businesses engaging
2 Why do you think that executives typically under-forecast?
1 The KPMG study suggests that poor forecasting costs money? How important do you think accurate forecasting is?
(b) Advise Tim on the plans, particularly on the adequacy of the loan sought from the bank.Identify any areas of concern that might require further information. Specifically comment on:i. the level
(a) Prepare a set of forecast financial statements, preferably using a spreadsheet. Make all of your assumptions clear. Try to identify the key input variables and input them in such a way as to
2 You estimate that an initial inventory of materials amounting to $8,000 will be needed, and will probably need to be maintained indefinitely. Tim will pay for any inventory in the month a!er
Tim, a friend of yours, has asked for your assistance, as he knows you are doing a business course. A new industrial estate has been set up in the area and he is wondering whether to buy a workshop
A business has total fixed costs in the current year of $100,000, made up of $30,000 depreciation, interest costs of $10,000 and $60,000 cash costs.Its non-current assets appear in the accounts at
3 What does an analysis of this type by a huge organisation teach you about the use of the financial accounting framework in assisting planning?
2 How useful do you think an analysis of this type is?
(b) Which are the more significant—changes in sales price or changes in price-linked costs?(c) Comment on the changes in volume.(d) Comment on the changes in controllable cash costs.(e) Discuss the
1 Access page 73 of the 2016 Annual Report:(a) Identify the most significant factors affecting underlying EBITDA for the financial year ending 30 June 2016.
Can you think of any circumstances under which managers might be prepared to provide projected financial information to those outside the business?
List the kind of broad matters you would expect to be dealt with in a long-term plan and a budget.
LO7 Identify the limitations of the traditional approach to control through budgets and standards.
LO6 Use a budget as a means of exercising control over the business, explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity
LO5 Construct a range of other budgets from relevant data
LO4 Explain the importance of cash budgeting, and prepare a simple cash budget from relevant data
LO3 Define a budget, set out the main components of the budget-setting process, explain how the various budgets interlink, and identify the main uses of budgeting
LO2 Explain the role of projected financial statements, prepare and evaluate a simple set of projected financial statements, explain how each of the statements is useful for planning and
LO1 Explain the relationship between corporate objectives, long-term plans and budgets, and also between planning and control
12 If so, how much can you repay and when?
LO1 Explain the importance of ratios in analysing financial performance, identify the possible bases for comparison, and identify the key aspects of financial performance and financial position that
LO2 Identify the main ratios used to analyse profitability, and apply these ratios to a business
LO3 Identify the main ratios used to analyse efficiency regarding usage of assets, and apply these ratios to a business
LO4 Identify the main ratios used to analyse liquidity, and apply these ratios to a business
LO5 Identify the main ratios used to analyse financial gearing (leverage), and apply these ratios to a business
LO6 Identify the main ratios used to analyse investment performance, and apply these ratios to a business
LO7 Identify a range of other issues relating to financial analysis, including the main limitations of ratio analysis.
Review the main areas for which ratios can typically be usefully calculated, and explain the advantages of the three bases for comparison (i.e. past periods, similar businesses and planned
1 Why would ROE be different for a business such as Wesfarmers as compared with Microso#?
2 Examine the structure and content of the income statement and statement of financial position for, say, Apple, and then do the same for Wesfarmers or Woolworths. Identify and discuss the main
3 Do you think that the ROE for Wesfarmers is adequate?
4 Discuss the variations over time and between the three auto companies in the ratios provided
1 While the average payment period fell, do you think this is likely to be ongoing. The report suggested that ‘businesses have exceptionally healthy cash flows as a result of the favourable credit
2 The report clearly saw 30 days as being prompt, but found that only 66% of businesses paid within this period. Is this acceptable? How might pressure be applied to slow payers? Given the increased
3 Would you expect there to be substantial differences to be found between different industry groups?
4 What differences might you expect to find between large and small businesses?
5 Why do you think that payment times are currently low in Australia?
1 Ivan Glasenberg raised the question, ‘Have we done the right thing?’ What are the lessons from Glencore’s experience in terms of corporate culture (particularly regarding opportunism and risk
2 It could be said that Arrium’s strategic direction was sound, in that it was intended to extend the life of the plant to 2027, but the iron ore that it was dealing with was high cost compared
3 In the context of South32, what do you understand by the term the ‘laziest balance sheet’? What are the implications of this in terms of opportunities?
1 Discuss the importance of dividend yield on P/E ratios and share price.
2 Discuss the reasons why P/E ratios for some companies are much higher than for others.
3 Try to identify those things that impact on share prices.You will need to explore much more background on the companies to be able to do this.
If a business is overtrading, do you think the following ratios would be higher or lower than normally expected?(a) Current ratio(b) Average inventories turnover period(c) Average settlement period
1 Some of the ratios calculated by Woolworths are different from those given in the chapter:(a) Current assets to current liabilities is expressed as a percentage. Does this matter? Convert the
(b) Sales to inventory is given, whereas the chapter shows cost of sales to inventory. Calculate the inventory turnover using cost of sales rather than sales. Is the conclusion different? Comment on
(c) Financial leverage uses a different ratio, and measures the number of times that total assets exceeds equity.It is not possible to work out the figures from the information provided in the annual
2 Over the period 2011–2015 Myer had a gross profit very close to 40%. Compare this figure with Woolworths’ average figure of around 27%. What might explain the difference?
3 Comment on the share price over the five-year period.
4 Comment on the dividend payout ratio and its sustainability.
Let us assume that research indicates that a particular ratio is shown to be a good predictor of failure.
Can you think of a practical problem that may arise when using this ratio to predict financial failure for a particular business?
1 Access and read the Mathurin article. Then discuss the following:(a) Your summary of the findings for companies with a Z-score of less than 1.
(b) What is the relationship between high scores and performance?
(c) What was the effect of the global financial crisis on Z-scores?
(d) The healthcare and IT sectors were found to have the highest Z-scores. Is this a surprise?
2 Access and read the Uebergang article. Then discuss the following:(a) The research suggests that quite a significant number of ASX listed companies fall into the ‘distressed’category. It is
(b) The article indicated that the proportion of companies found in the distressed category had fallen. How and why do you think this happened?
3 Access and read the gurufocus article. Then discuss the following:(a) The Walter Schloss approach to investing.(b) The distribution of Altman Z-scores for the S&P 500 presented in the article.
(c) Why do you think that technology companies have the strongest scores?
1 In Chapter 7 we discussed segment reporting. Which of the ratios discussed in this chapter are most likely to be used by Head Office in analysing performance of the segments?
2 How would you determine appropriate benchmarks for comparison with these segments?
3 Who should be responsible for initiating and carrying out analysis of a segment (or department) and for subsequent reporting back and implementation of any changes as a result?
LO1: Explain the importance of ratios in analysing financial performance, identify the possible bases for comparison, and identify the key aspects of financial performance and financial position that
LO2: Identify the main ratios used to analyse profitability, and apply these ratios to a business
LO3: Identify the main ratios used to analyse efficiency regarding usage of assets, and apply these ratios to a business
L04: Identify the main ratios used to analyse liquidity, and apply these ratios to a business
LO5: Identify the main ratios used to analyse financial gearing (leverage), and apply these ratios to a business
L06: Identify the main ratios used to analyse investment performance, and apply these ratios to a business
LO7: Identify a range of other issues relating to financial analysis, including the main limitations of ratio analysis
10.15 LO2 Ratios that use values from both the income statement and the balance sheet require the calculation of average amounts for the balance sheet amounts. Why is this done, and when will the
Provide an example of a commonly used ratio. (Hint: Think of driving a car.) What makes a ratio? What makes a ratio useful?
Briefly describe each of the main categories of financial ratios. Which category of ratios is the most important in your opinion? Why?
Complete the following sentence: The gross profit margin percentage represents the proportion of What do efficiency measures indicate about a business?
Describe calculation of an efficiency measur for learning accounting. The current and quick (acid test) ratios are both measures of what?
Which of the two ratios is a stricter test, and how does it accomplish this?
Describe two financial gearing ratios. What aspect of a business are they attempting to portray?
Provide a brief explanation along with an advantage and a disadvantage for each of the four main ratios used to evaluate investment performance.
List and briefly describe other methods that can be used for financial statement analysis.
Does the ROSF ratio provide a better measure of performance than the 'bottom line' profit value?
Compare this with someone telling you that they ran five kilometres before coming to class today.
Would you expect the operating profit margin to be higher or lower than the gross profit margin?

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