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business
advanced financial accounting

Questions and Answers of Advanced Financial Accounting

Consider two ways of looking at the profit of a business: an increase in the book wealth of the company; and the net result of the company’s trading operations (revenue less expenses). What do
Explain the format and structure of the balance sheet of a typical limited company.
Explain what assets, liabilities, and shareholders’ equity are, and give some examples of the items included in each of these categories.
(i) What accounting convention is generally used in the valuation of non-current assets?(ii) What additional costs may sometimes be included within non-current assets costs and to which assets may
Why are current assets and non-current assets shown under different balance sheet classifications?
What factors influence the accurate valuation of a company’s trade receivables?
Why should a potential investor exercise caution when analyzing the balance sheets of potential companies in which to invest?
‘Surely the purchase of non-current assets is expenditure just like spending on stationery or photocopy expenses so why should it appear as an entry in the balance sheet?’ Discuss.
‘It has often been said that the value of every item in a balance sheet is a matter of opinion and the cash and bank balances are the only numbers that can truly be relied upon.’ Discuss.
Mr IM Green – Manager Ian admired the sign on the door to his new offi ce, following his appointment as manager of the human resources department. The previous manager left fairly suddenly to join
The balances in the accounts of Vertico Ltd at 31 July 2010 are as follows:(i) An important number has been omitted. What is that?(ii) Using the data provided and the missing data prepare a balance
You are required to prepare a balance sheet for Trainer plc as at 31 December 2010 using the trial balance at 31 December 2010 and the additional information shown on the next page.Additional
The following information relates to Major plc at 31 December 2010 and the comparative numbers at 31 December 2009.Prepare a balance sheet in the format adopted by most of the leading UK plcs showing
From the trial balance of Gremlins plc on 31 March 2010 identify the assets and expenses (debit balances) and income, liabilities, and equity (credit balances). Confirm that the trial balance is in
Prepare a balance sheet as at 31 December 2010 for Gorban Ltd based on the following trial balance, and the further information shown below.You are given the following additional information, which
You are required to prepare a balance sheet as at 31 December 2010 from the following summary of Pip Ltd’s fi nancial position at 31 December 2010. Brands worth 10,000 (directors' opinion)
How would you define the profit (or loss) earned by a business during an accounting period?
Outline an income statement showing each of the main category headings using the business functions format.
(i) Which accounting or financial reporting standard contains provisions relating to the format of the income statement?(ii) What are the requirements that are relevant to the formats of the income
The income statement and the balance sheet report on diff erent aspects of a company’s fi nancial status. What are these diff erent aspects and how are they related?
(i) Why are the methods used for the valuation of the various types of assets so important?(ii) Describe the three main categories of asset that are most relevant to asset valuation.
What is depreciation and what are the problems encountered in dealing with the depreciation of non-current assets?
How does the valuation of trade receivables impact on the income statement of a business?
Profit does not equal cash, but how can the one be reconciled with the other for a specific accounting period?
‘My profit for the year is the total of my pile of sales invoices less the cash I have paid out during the year.’ Discuss.
‘The reason why companies make a provision for depreciation of their non-current assets is to save up enough money to buy new ones when the old assets reach the end of their lives.’ Discuss.
Why is judgement so important in considering the most appropriate method to use for valuing inventories? What are the factors that should be borne in mind and what are the pros and cons of the
Mr Kumar’s chemist shop derives income from both retail sales and prescription charges made to the NHS and customers. For the last two years 31 December 2009 and 31 December 2010, his results were
Discuss the concepts that may apply and practical problems that may be encountered when accounting for:(i) the acquisition of desktop personal computers, and(ii) popular brands of products supplied
A friend of yours owns a shop selling CDs and posters for the 12- to 14-year-old market.From the following information advise him on the potential problems that may be encountered in the valuation of
The Partex company began trading in 2008, and all sales are made to customers on credit. The company is in a sector that suffers from a high level of bad debts, and a provision for doubtful debts of
Tartantrips Ltd, a company in Scotland, operates several ferries and has a policy of holding several in reserve, due to the weather patterns and conditions of various contracts with local
The following financial information that has been provided by Lazydays Ltd, for the year ended 31 March 2010 (and the corresponding numbers for the year to 31 March 2009), construct an income
A lorry was purchased for £45,000 on 1 January 2010 and was expected to last for five years after which it was estimated that it could be sold for £8,000 The company uses the straight-line method
From the trial balance of Retepmal Ltd on 31 March 2010 shown below prepare an income statement for the year to 31 March 2010 and a balance sheet as of 31 March 2010 using the formats used by most UK
(i) How would you define cash generated by a business during an accounting period?(ii) Which International Accounting Standard (IAS) deals with cash flow?
Give an example of the supporting analyses and notes that are prepared in support of the main statement of cash flows.
Describe the ways in which both the direct method and the indirect method may be used by a business to derive cash generated from operations during an accounting period.
(i) Which cash analysis is used to link the statement of cash fl ows to the income statement?(ii) How does it do that?
(i) Which cash analysis is used to link the statement of cash fl ows to the balance sheet?(ii) What are the links?
Why is cash so important, compared to the other assets used within a business?
(i) What questions does the statement of cash fl ows aim to answer?(ii) How far does it go towards answering them?
Why is the information disclosed in the income statement and the balance sheet not considered suffi cient for users of fi nancial information? What is so important about cash fl ow that it has an
‘Forget your income statements and balance sheets, at the end of the day it’s the business’s healthy bank balance that is the measure of its increase in wealth.’ Discuss.
Candice-Marie James and Flossie Graham obtained a one-year lease on a small shop which cost them £15,000 for the year 2010, and in addition agreed to pay rent of £4,000 per year payable one year in
Jeffrey Packaging plc has used the following information in the preparation of its financial statements for the year ended 31 March 2010.You are required to prepare a cash generated from operations
From the income statement for the year ended 31 December 2010 and balance sheets as at 31 December 2009 and 31 December 2010, and the additional information shown below, prepare a statement of cash
Llareggyb Ltd started business on 1 January 2010 and its year ended 31 December 2010. Llareggyb entered into the following transactions during the year.Received funds for share capital of £25,000
The balance sheets for Victoria plc as at 30 June 2009 and 30 June 2010 are shown below:The following information is also relevant:1. During the years 2009 and 2010 Victoria plc disposed of no
Sparklers plc have completed the preparation of their income statement for the year ended 31 October 2010 and their balance sheet as at 31 October 2010. During the year Sparklers sold some
Dimarian plc’s income statement for the year ended 31 December 2010, and its balance sheets as at 31 December 2010 and 2009, are shown below. Dimarian plc issued no new ordinary shares during the
(i) Which areas of the business do auditors’ opinions cover?(ii) What happens if there is any fundamental uncertainty as to compliance?
Explain the implications of the ‘expectation gap’ with regard to external auditors.
Explain the obligations of directors of limited companies in terms of their duty of care, their fi duciary duty, and the Corporate Manslaughter and Corporate Homicide Act (2007).
If the severity of the penalty is determined by the seriousness of the offence, describe the half dozen or so most serious offenses under the Company Directors (Disqualification) Act 1986 (as amended
Outline the general responsibilities of a director of a limited company with regard to the company, its shareholders and other stakeholders.
What are the key actions that a director of a limited company may take to ensure compliance with his or her obligations and responsibilities?
Discuss, and illustrate with some examples, how far you think the UK Corporate Governance Code goes to preventing the kind of corporate excesses we have seen in the recent past.
‘I pay my auditors a fortune in audit fees. I look upon this almost as another insurance premium to make sure that I’m protected against every kind of fi nancial risk.’ Discuss.
‘Everyone who embarks on a career in industry or commerce aspires to become a director of their organisation, because then all their troubles are over! Directors just make a few decisions, swan
In an age of increasingly sophisticated computer systems is the traditional role of the auditor coming to an end?
Discuss why users of financial statements should have information on awards to directors of Share options, allowing them to subscribe to shares at fixed prices in the future.
Outline the basic reasons why there should be openness regarding directors’ benefits and ‘perks’.
Can you think of any reasons why directors of UK pics found that their contracts were no longer to be open-ended under the new regime of corporate governance?
After the birth of her twins, Vimla Shah decided to take a couple of years away from her career as a company lawyer. During one of her coffee mornings with Joan Turnbull, Joan confided in her that
Li Nan has recently been appointed managing director of Pinger's plc, which is a company that supplies table tennis equipment to clubs and individuals throughout the UK and Europe. Li Nan is
Use the following information, extracted from Tomkins plc report and accounts for 2000, as a basis for discussing the users of financial information’s need for information on directors’
Explain what is meant by insolvency and outline the responsibilities of receivers appointed to insolvent companies.
(i) Who is likely to carry out a business performance review?(ii) Describe what may be required from such reviews giving some examples from different industries and differing perspectives.
(i) Outline how the business performance review process may be used to evaluate the position of a dot.com company like Amazon UK.(ii) What are the limitations to the approach that you have outlined?
How is ratio analysis, in terms of profitability ratios, efficiency ratios, liquidity ratios, investment ratios, and financial structure ratios used to support the business review process?
Why should we be so careful when we try to compare the income statement of a limited company with a similar business in the same industry?
(i) Why does profit continue to be the preferred basis for evaluation of the financial performance of a business?(ii) In what ways can cash flow provide a better basis for performance evaluation, and
In what ways may the performance review process be used to anticipate and react to change?
‘Lies, damned lies, and statistics.’ In which of these categories do you think ratio analysis sits, if at all?
The information below relates to Priory Products plc’s actual results for 2009 and 2010 and their budget for the year 2011.You are required to calculate the following fi nancial ratios for Priory
From the fi nancial statements of Freshco plc, a Lancashire-based grocery and general supplies chain supplying hotels and caterers, for the year ended 30 June 2010, prepare a report on performance
(i) Why, and for whom, do the annual reports and accounts of limited companies have to be prepared?(ii) Where do they have to be filed?(iii) Who are the main users of the information contained in the
(i) Why do you think that the directors, chairman, chief executive and finance director of a plc each need to provide a statement or report for inclusion in the annual report and accounts?(ii) What
(i) Describe the key elements of Johnson Matthey’s financial review that are included in their report and accounts for 2011, and what these indicate about the performance of the business.(ii) Why
Describe the technique of horizontal analysis and how it may be used to evaluate, explain, and compare company performance.
Describe the technique of vertical analysis and how it may be used to evaluate, explain and compare company performance.
(i) What were the inadequacies in financial statement reporting that IFRS 8, Operating Segments, sought to address and how did it do this?(ii) What are the practical problems that companies face
(i) Why do you think that sustainability reporting has become increasingly important in terms of corporate awareness, and the awareness of the non-business community?(ii) Examine the annual reports
(i) How does inflation distort accounting information that has been prepared under the historical cost convention?(ii) In what ways has the accountancy profession considered some alternative
(i) Explain what is meant by a value-added statement.(ii) In what ways may a value-added statement be used to measure financial performance?(iii) What are the disadvantages of using value-added
What information included in the annual report and accounts of UK publicly listed companies(PLCs) may influence prospective investors and in what ways? How impartial do you think this information is?
‘The annual reports and accounts prepared by the majority of UK plcs serve to ensure that shareholders, and other stakeholders, are kept very well informed about the aff airs of their
‘In the global competitive world in which we live, company directors should be able to exercise their full discretion as to the amount of information they disclose in their annual reports and
‘The main reason that companies increasingly include sustainability reports in their annual reports and accounts is to change the views of users and regulators about the activities in which their
Prepare a horizontal analysis from this information, with 2010 as the base year, and use it to explain the appropriate elements of financial performance and the changes in the financial position of
Why may leasing be considered as a long-term source of finance?
How does risk impact on the cost of debt and equity?
How may a company’s return on equity (ROE) be related to its financial structure?
In what way is company growth of such interest to shareholders?
Business performance may be evaluated to determine ways in which it can be improved upon. If managers are capable of delivering improved performance how can EVA be used to support this?
The former owner and manager of a private limited company recently acquired by a large plc, of which he is now a board member, said: ‘This company has grown very quickly over the past few years so
In the long run does it matter whether a company is financed predominantly by ordinary shares or predominantly by loans? What’s the difference?
The marketing manager of a large UK subsidiary of a multinational plc: ‘Surely the interest rate that we should use to discount cash flows in our appraisal of new capital investment projects should
A critically important factor required by a company to make financial decisions, for example, the evaluation of investment proposals and the financing of new projects, is its cost of capital. One of

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