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business
accounting for business

Questions and Answers of Accounting for Business

L04: Explain and discuss the main financial statements prepared by a limited company
LO5: Explain the concept of group or consolidated accounts
6.1 LO1 What is meant by a company having ‘perpetual life’? Is this ‘life’ different for a limited company as compared to a proprietary company?
6.2 LO1/2/3 In what sense do preference shares have an ‘advantage’ or ‘priority’ over ordinary shares?
6.3 LO2 Six friends decide to form a company to start a business. They agree to supply $10,000 each to provide the initial capital. They are thinking of having a share capital of six shares each
6.4 LO5 When are group or consolidated accounts required, and what is the purpose for their preparation?INTERMEDIATE
6.5 LO1 How do you determine whether a company can be classified as ‘small’ under the Australian Corporations Act?
6.6 LO1 What are the main areas that directors need to disclose in their report?
6.7 LO1/2 Why would a business choose to make the following entity structure changes?(a) From a sole proprietorship or partnership to a private company(b) From a public company to a private company.
6.8 LO1 Is ‘limited liability’ a good thing? Explain.
6.9 LO2 What is the difference between a share issued as a ‘bonus share’ and a ‘rights share’ from the perspective of the:(a) shareholder?(b) company issuing the shares?(c) unsecured creditor?
6.10 LO3 Why is the Corporations Act particularly interested in distinguishing between ‘a return on capital’and ‘a return of capital’?
6.11 LO1/2 Can reserve accounts have a negative balance? If yes, provide an example.
6.12 LO4 Discuss the three guiding principles relating to monitoring and control of the behaviour of directors;namely disclosure, accountability and fairness.
6.13 LO1/2 Can you think of any reason why the price at which shares are transferred from one person to another may be different from the amount originally invested in the company?
6.14 LO3 How can a company’s supplier minimise the risk carried by the limited liability of shareholders?
6.15 LO2/3 Your non-accountant friend has asked you to explain what is represented by the ‘Reserve for Future Research & Development’ account on PHB Ltd’s balance sheet. Explain what this
6.16 LO4 Describe the similarities and differences between the main financial statements prepared for a limited company and those for a sole proprietorship or partnership.
6.17 LO3 What is a chief means by which the Corporations Act protects the interests of creditors and other external lenders?
6.18 LO4 In light of the various corporate collapses and scandals in recent years (e.g. HIH Insurance), you’re concerned about the accuracy of corporate financial statements. What is your chief
6.19 LO1/2 Summarise the rules relating to payment of dividends. Do these rules adequately protect creditors and lenders?
6.20 LO5 What two corporate structure features must exist if a company is showing a ‘minority interest’account on its balance sheet?
6.1 LO1 Test your knowledge of various aspects of limited liability companies. Match the terms in 1–10 in the first list with the corresponding definitions A–J in the second list.1 Share 2 Ltd 3
6.2 LO2 Pillar Limited issued 10,000 ordinary shares at $5 and made a call at $3. Calls are in arrears at balance day for 500 shares.Calculate Pillar Limited’s share capital balance.
6.3 LO2 (a) Show the effect on the statement of financial position of the following transactions:(i) 100,000 shares issued at a price of $1 per share, but only 50¢ per share is called(ii) after the
6.4 LO2 A company has the statement of financial position given below.Net assets 200,000 Ordinary share capital issued at $1 per share 100,000 Retained profits 100,000 200,000 The market value per
(b) The company intends to issue 100,000 more shares at the market price. Show the statement of financial position after this issue.
(c) What is the book value per share after the new issue?
(d) What reasons may exist for the book value per share to differ from the market price per share?
6.5 LO1/2 (a) Frothy Ltd started trading in 2016 and it made a loss for the year of $100,000. In 2017, it made a profit of $50,000. What is the maximum dividend that it could pay at the end of 2017?
(b) Bubbly Ltd started trading in 2016 and made a profit for the year of $100,000. In 2017, it made a loss of $60,000. What is the maximum dividend the company could pay at the end of 2017, assuming
(c) As well as the results given in (b) above, you find that Bubbly Ltd sold a plot of land, which had cost $100,000, for $150,000, and had revalued another similar plot, which had cost $100,000, to
6.6 LO4 CBD Ltd recently paid $4,000,000 for 60% of LKJ Ltd’s equity. LKJ Ltd had total assets of $6,500,000 and liabilities of $1,300,000. What amount of goodwill on consolidation will CBD Ltd
6.7 LO4 Gibbons Ltd purchased 100% of the shares of one of their competitors (PJB Ltd) at a total cost of$2,500,000. At the purchase date Gibbons Ltd had total assets of $14,000,000 and liabilities
6.8 LO5 The following statements of financial position relate to H Ltd and S Ltd as at 31 December 2017.H Ltd $’000 S Ltd $’000 Net assets 10,200 9,000 Investments in S Ltd 6,800 17,000 9,000
6.9 LO1/3 Your partner has just given you your 21st birthday present: 2,100 ‘non-redeemable, participating, cumulative, non-voting 10% preference shares’.Complete the table below, explaining the
6.11 LO2 A company had the following events during its most recent financial year:1 A non-current asset was sold for a profit of $20,000.2 A profit of $45,000 was made on trading operations.3 An
6.12 LO2 Cheshire Ltd has a general reserve of $200,000 and a bank overdraft of $300,000. The chief executive would like to distribute all of the general reserves in the form of a dividend. He
6.13 LO3 Consider the following statements.A limited company cannot pay dividends to ordinary shareholders where:1 An operating loss is made in the period to which the proposed dividends relate.2 A
6.14 LO4 Yankees Limited earned a profit before taxation of $500 million and expects to pay income tax at the rate of 30%. The company paid an interim dividend of $2 per share and expects to pay a
6.15 LO2 (a) The summarised statement of financial position of Leon Ltd is shown below:Net assets 2,000,000 Ordinary share capital issued at $1 1,200,000 Preference share capital issued at $1 300,000
(b) What would you have needed to do if the replacement issue had not taken place?
(c) Explain the rationale for your answer to (b).
6.16 LO2 The summarised statement of financial position of CF Ltd is as follows:Net assets 1,600,000 Ordinary share capital issued at $1 800,000 Revaluation reserve 400,000 Retained profits 400,000
(b) Explain the movements in reserves.
6.17 LO5 Big Box Ltd recently paid $4,000,000 for 90% of Subsid Ltd’s equity. Subsid Ltd had total assets of$4,500,000 and liabilities of $1,500,000.(a) What amount of goodwill on consolidation (if
(b) What is the amount of minority interest (if any) that Big Box will record?
6.18 LO5 The following statements of financial position relate to H Ltd and S Ltd as at 31 December 2017.H Ltd $’000 S Ltd $’000 Net assets 10,200 7,500 Investments in S Ltd 5,000 15,200 7,500
6.19 LO3 Woolwell Ltd has the following equity capital at year-end:Ordinary shares of $0.25 each $400,000 Revaluation reserve 160,000 General reserve 40,000 Retained profits 50,000$650,000 In
2 dividend per share to ordinary shareholders?
6.20 LO3 Efford Ltd has the following equity capital at year-end.Ordinary shares of $0.50 each $200,000 Revaluation reserve 50,000 General reserve 80,000 Retained profits 62,000$392,000 In addition,
2 dividend per ordinary share?
6.21 LO4 Presented below is a draft set of financial statements for Chips Ltd.CHIPS LTD Income statement for the year ended 30 June 2017$’000 Revenue 1,850 Cost of sales (1,040)Gross profit 810
6.22 LO4 Rose Ltd operates a small chain of retail shops which sell high-quality teas and coffees. Approximately half of the sales are on credit. Abbreviated and unaudited accounts are given
6.23 LO5
2 What is the basis of valuation of trade and other receivables and inventories for 2016?
3 What do you think are likely to be the main components in the figure for ‘property, plant and equipment’ in the balance sheet (statement of financial position)?
5 What items do you think might be covered under the heading ‘intangible assets’ in the balance sheet (statement of financial position)? How do you think the various items might be valued and
7 The ‘provisions’ in the current liabilities are mainly made up of employee benefits, leased premises and restructuring. Those in the non-current liabilities include employee benefits and leased
8 ‘Reserves’ in the balance sheet (statement of financial position) are negative. What does this mean?
9 What are the main reasons for the differing performances regarding normal profit in the two years covered by the income statement?
LO1 Explain the importance of company law in relation to the directors’ duty to account, and discuss the role of the auditor in this process
LO2 Explain why there is a need for accounting rules, explain the importance of accounting standards and map the development of accounting standards through to the development of international
LO3 Outline the role of the Australian Securities Exchange with regard to company reporting and management, with particular reference to corporate governance
LO4 Identify the main requirements relating to the published annual report, including all of the financial and ancillary statements
LO5 Explain the rationale for preparing segment reports and describe the reporting requirements
LO6 Define the term creative accounting, describe the kind of methods used and identify steps that might be used to prevent it occurring.
(a) What are the possible consequences of failing to make financial statements available to shareholders, lenders and suppliers on the ability of the business to operate?
(b) How important is the publication of well-regulated annual reports to the efficiency of the private sector?
1 How important are auditors in assuring that investors are dealing with a confident and informed market?
2 What is the relationship between the directors and the auditors?
3 What do you think is understood by the term ‘professional scepticism’? Can you think of examples of ways in which a lack of professional skepticism might cause problems?You might like to think
4 Many of the findings related to accounting estimates(including impairment) and accounting policy choices. One area of business that the report focused on was extractive industries. What kind of
5 Adele Ferguson, in an article entitled ‘Conflict of interest at the heart of audit disasters’ (The Age, 5 December 2012), relating to an earlier ASIC audit report argued that there is a real or
Which of the following is NOT true?A It is not usually possible for all of a company’s shareholders to be involved in the general management of the company in which they own shares.B Most
(a) What have been the main reasons for pressure towards international harmonisation of accounting practices and adoption of common standards?
(b) What benefits could be gained from the Australian Accounting Standards Board adopting the International Accounting Standards?
(c) Can you think of any disadvantages for Australia in adopting the International Accounting Standards?
How do you think the development of a conceptual framework would help reduce the number of rules required?
(b) Why do you think Stock Exchange listed companies are required to disclose more information about their business than other companies?
Do you think that mismanagement can be avoided by imposing highly prescriptive governance systems and structures? Why/why not?
What does this imply about the difficulties in ensuring that reports are sound, in terms of setting in place detailed rules of corporate governance?
1 Page 45 of the New Zealand Oil & Gas Limited Annual Report 2016 sets out in more detail the company’s Code of Business Conduct and Ethics. Discuss this code and compare it with the ideas raised
2 Evaluate this statement in terms of the ASX Corporate Governance Principles?
3 Do you feel that the environmental and social sustainability issues are addressed sufficiently in the report?
What do you see as the likely future of corporate governance? What about ongoing issues?
1 While the school is not formally a business, it will still need to keep financial records. What differences(if any) do you think you will find in terms of the financial records that are kept at the
2 What do you think the audit procedures might be?
3 Do you think there will be any specific profitability objectives?
4 What size do you think the board should be?
5 What skills should it aim to have?
6 How important is the relationship between the board, its chair and the head teacher?
7 What kind of rules would you anticipate being applied regarding the presentation and assessment of financial results?
What do you think are the main advantages of adopting the management approach to segment identification?
1 Access the segment report for Harvey Norman. What does this reveal about profitability of the various segments?
2 Did the listing of segment descriptions give you any surprises?
3 Access the segment report for Origin. What do you think is meant by the term ‘underlying profit’?
4 Access the segment reports of Wesfarmers, which is more of a conglomerate than the two entities used in Real World 7.5? How important is segment reporting in assessment of performance of a company
(a) Why might a business wish to manipulate the transfer price between segments?
(b) Can you provide any examples of where authorities are putting pressure on business regarding tax?

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