Questions and Answers of Cost And Management Accounting An Introduction

1. Explain what is meant by:(a) Cost allocation.(b) Cost apportionment.
Define, calculate and interpret ratios that help analyse and understand(a) performance for investors, (b) management performance, (c) liquidity and working capital and (d) gearing.AppendixLO1
Explain investors’ views of the balance of risk and return, and the risks of investing in a geared company when profits are fluctuating.AppendixLO1
Explain how the pyramid of ratios helps integrate interpretation.AppendixLO1
Describe the uses and limitations of ratio analysis.AppendixLO1
Carry out a practical exercise of calculating and interpreting ratios.AppendixLO1
Which ratios provide information on performance for investors? (Section 13.3.1)AppendixLO1
Which ratios provide information on management performance? (Section 13.3.2)AppendixLO1
Which ratios provide information on liquidity and working capital? (Section 13.3.3)AppendixLO1
Which ratios provide information on gearing? (Section 13.3.4)AppendixLO1
What is the view of investors on risk and return? (Section 13.4)AppendixLO1
Why is financial gearing riskier for a company which has fluctuating profits? (Section 13.4.3)AppendixLO1
Explain the use of the pyramid of ratios in analysis of performance. (Section 13.5)AppendixLO1
What are the limitations of ratio analysis? (Section 13.6)AppendixLO1
The following financial statements relate to Hope plc:Income statement (profit and loss account)for the year ended 30 June Year 4£000s £000s Revenue 6,200 Cost of sales (2,750)Gross profit 3,450
The following financial statements relate to Charity plc:Income statement (profit and loss account)for year ended 30 September Year 4£000s £000s Revenue 2,480 Cost of sales (1,100)Gross profit
Carry out a ratio analysis of Safe and Sure plc, using the financial statements set out in Appendix I (at the end of this book) and applying the method of analysis set out in section 13.6.Making a
Explain the importance of the operating and financial review as a component of the annual report of a company.AppendixLO1
Describe and explain other useful information in the annual report that is relevant to analysis of corporate performance.AppendixLO1
Relate the interpretation of ratios to the information in a statement of cash flows.AppendixLO1
Explain how segmental information is useful to the analysis of corporate performance.AppendixLO1
What is the objective of the operating and financial review? (Section 14.2.1)AppendixLO1
Why is there no prescribed format for the OFR? (Section 14.2.2)AppendixLO1
What are the main principles set by the ASB for the OFR? (Section 14.2.2)AppendixLO1
What are the main elements of the disclosure framework for the OFR? (Section 14.2.3)AppendixLO1
What are key performance indicators (KPIs)? (Section 14.2.4)AppendixLO1
What are the particular requirements of the OFR Regulation that must be reported in an OFR? (Section 14.2.5)AppendixLO1
What are the responsibilities of the directors and auditors in relation to the OFR?(Section 14.2.6)AppendixLO1
What is the purpose of a highlights statement? (Section 14.3.1)AppendixLO1
How does a five-year summary of historical results help investors? (Section 14.3.2)AppendixLO1
How does segmental information help the users of financial statements? (Section 14.4.1)AppendixLO1
Which items are reported on a segmental basis? (Section 14.4.1)AppendixLO1
How are segments identified? (Section 14.4.3)AppendixLO1
Why is off-balance-sheet finance a problem in accounting? (Section 14.5)AppendixLO1
What principles are recommended by the UK ASB for determining whether assets and liabilities should be reported on the statement of financial position (balance sheet)?(Section 14.5.2)AppendixLO1
What is a special purpose entity? (Section 14.5.3)AppendixLO1
What is corporate social responsibility? (Section 14.6)AppendixLO1
What is the Global Reporting Initiative? (Section 14.6.3)AppendixLO1
What accounting issues arise in relation to carbon trading? (Section 14.6.4)AppendixLO1
What is meant by corporate governance? (Section 14.7)AppendixLO1
What is the Combined Code? (Section 14.7.1)AppendixLO1
How does financial reporting help to improve corporate governance?AppendixLO1
Why has it been found impossible to write a definitive guide on the meaning of ‘a true and fair view’? (Section 14.8)AppendixLO1
What are the limitations of historical cost accounting? (Section 14.9.2)AppendixLO1
Why is it desirable to remeasure assets and liabilities subsequent to acquisition?(Section 14.9.3)AppendixLO1
Explain what is meant by entry price and exit price. (Section 14.9.4)AppendixLO1
Explain what is meant by fair value. (Section 14.9.6)AppendixLO1
Should accounting standards focus primarily on the needs of users?AppendixLO1
Suggest, with reasons, three KPIs for each of the following types of business, and explain why it is unlikely that two businesses will choose identical KPIs.(a) a private hospital(b) a car repair
Carry out a trend analysis on Safe and Sure plc, using the historical summary set out in Appendix I. Write a short report on the key features emerging from the trends.AppendixLO1
Explain why statements of cash flows are regarded as providing useful information.AppendixLO1
Explain the meaning of cash and cash equivalents.AppendixLO1
Explain the direct and the indirect forms of presentation of a statement of cash flows.AppendixLO1
Prepare a statement of cash flows using the direct and the indirect method.AppendixLO1
What is the definition of ‘cash’? (Section 15.2)AppendixLO1
What is the definition of ‘cash equivalent’? (Section 15.2)AppendixLO1
What is meant by the ‘direct method’ of calculating operating cash flow? (Section 15.3.1)AppendixLO1
What is meant by the ‘indirect method’ of calculating operating cash flow?(Section 15.3.2)AppendixLO1
Why is depreciation ‘added back’ to operating profit in the indirect method of calculating operating cash flow? (Section 15.3.2)AppendixLO1
What is the effect on cash flow of an increase in inventory levels? (Section 15.3.2)AppendixLO1
What is the effect on cash flow of an increase in trade receivables (debtors)?(Section 15.3.2)AppendixLO1
What is the effect on cash flow of an increase in trade payables (creditors)?(Section 15.3.2)AppendixLO1
What are the relative benefits of the direct method compared to the indirect method?(Section 15.3.3)AppendixLO1
What are the three main sections of a statement of cash flows? (Section 15.4)AppendixLO1
What kinds of items in a profit and loss account do not involve a flow of cash?(Section 15.4)AppendixLO1
What happens to cash flow when working capital increases? (Section 15.4)AppendixLO1
How is taxation paid calculated from the taxation payable and the taxation liability at the start and end of the period? (Section 15.4)AppendixLO1
How is the cash paid for additions to fixed assets if we know the opening and closing balances and there are no disposals? (Section 15.4)AppendixLO1
Explain how the proceeds of sale of a non-current asset differ from the net book value.(Section 15.4)AppendixLO1
Explain how the cash proceeds of a share issue are calculated from knowledge of the share capital and the share premium reserve. (Section 15.4)AppendixLO1
Explain how cash received from customers is calculated if we know the sales of the period and the receivables (debtors) at the start and end of the period. (Section 15.5)AppendixLO1
Explain how the purchases of goods or materials is calculated if we know the cost of goods sold and the inventory (stock) at the start and end of the period. (Section 15.5)AppendixLO1
Explain how the cash paid to suppliers is calculated if we know the purchases and the payables (creditors) at the start and end of the period.AppendixLO1
Sales on credit during Year 2 amount to £120m. The trade receivables (debtors) at the start of Year 2 were £8. The trade receivables (debtors) at the end of Year 2 were £10. What is the amount of
Purchases on credit during Year 3 amount to £20m. The trade payables (creditors) at the start of Year 3 were £6m. The trade payables (creditors) at the end of Year 3 were £4m. What is the amount
The equipment at cost account at the start of Year 2 records a total of £34m. The equipment at cost account at the end of Year 2 records a total of £37m. An asset of original cost £5m was sold
A vehicle costing £20m and having accumulated depreciation of £12m was sold for £5m. How will this information be reported in the statement of cash flows? 1. The share capital account increased by
The corporation tax charge in the income statement (profit and loss account) for Year 2 was£30m. The tax liability in the balance sheet at the start of Year 2 was £6m. The tax liability in the
D Ltd has an operating profit of £12m, which includes a depreciation charge of £1m. During the year the trading stock has increased by £4m, trade debtors have increased by £3m and trade creditors
E Ltd has an operating profit of £16m, which includes a depreciation charge of £2m. During the year the trading stock has increased by £1m, trade debtors have decreased by £3m and trade creditors
The directors of Fruit Sales plc produced the following income statement (profit and loss account) for Year 2 and balance sheet at the end of Year 2.Income statement for year 2£m Revenue 320 Cost of
Consider the following:£m Revenue 320 Cost of sales (143)Gross profit 177 Investment income – interest received 5 Loss on disposal of equipment (8)Depreciation (39)Administrative and selling
Set out below is a summary of the accounting records of Titan Ltd at 31 December Year 1:£000s £000s Assets Land and buildings 200 Plant and machinery 550 Investment in shares 150 Stock 250 Trade
Suppose the factory building in question B12.4 was valued by the professional expert at£240,000. What effect would this information have on the reported financial statements?
Fragrance plc has owned a factory building for many years. The building is recorded in the statement of financial position (balance sheet) at £250,000, being historical cost of £300,000 less
The following is a summarised statement of financial position (balance sheet) of Nithsdale Ltd.£000s Cash 20 Other assets less liabilities 320 340 Ordinary shares (400,000 of 25 pence each) 100
Explain the effect on the accounting equation of the following transactions and decisions regarding dividends:(a) The company pays a dividend of £20,000 during the accounting period.(b) The
Explain the effect on the accounting equation of each of the following transactions:(a) At the start of Year 1, Bright Ltd issues 200,000 shares at nominal value 25 pence per share, receiving
What is meant by:(a) offer for sale; (section 12.8.1)(b) capitalisation issue; and (section 12.8.2)(c) rights issue? (section 12.8.3)Explain the effect of each of the above on the statement of
How do the directors report their recommended dividend for the financial period, to be agreed at the shareholders’ meeting? (Section 12.7)AppendixLO1
What is the purpose of the reconciliation of movements in equity? (Section 12.6.5)AppendixLO1
What is the purpose of the statement of total recognised income and expenses?(Section 12.6.4)AppendixLO1
Where may the reader of the annual report find out about the effect of movements in foreign exchange rates? (Section 12.3.6)AppendixLO1
Why may the revaluation of a non-current (fixed) asset not be reported in the profit and loss account? (Section 12.3.5)AppendixLO1
How is the revaluation of a non-current (fixed) asset reported? (Section 12.3.5)AppendixLO1
What is a share premium? How is it recorded? (Section 12.3.4)AppendixLO1
Why does the company not record the buying and selling of shares in its statement of financial position (balance sheet)? (Section 12.3.3)AppendixLO1
What is the effect on the accounting equation where new shares are issued for cash?(Section 12.3.1)AppendixLO1
What is the definition of ownership interest? (Section 12.2)AppendixLO1
Why may it be said that the ownership interest is the residual item in the accounting equation? (Section 12.1)AppendixLO1

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