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financial accounting an introduction

Questions and Answers of Financial Accounting An Introduction

The following information was extracted from the financial statements of I. Ching (Booksellers)plc for the year to 31 December 2011:£000 Finance charges 40 Cost of sales 460 Distribution expenses
Segmental information relating to Dali plc for the year to 31 December 2011 is as follows:Car parts Aircraft parts Boat parts Total£m £m £m £m Revenues from external customers 360 210 85 655
Obtain a copy of the business review for two separate companies within the same industry.Compare the usefulness of each. In answering this question, consider the extent to which each of the two
Manet plc had the following share capital and reserves as at 1 January 2011:£m Share capital (£0.25 ordinary shares) 250 Share premium account 50 Revaluation reserve 120 Currency translation
‘A business review should not be prepared by accountants but should be prepared by the board of directors.’ Why should this be the case?Review questions CHAPTER 5 Accounti ng for 208 limit ed
What problems does a user of segmental financial statements face when seeking to make comparisons between businesses?AppendixLO1
The size of annual financial reports published by limited companies has increased steadily over the years. Can you think of any reasons, apart from the increasing volume of accounting regulation, why
‘Searching for an agreed framework of principles for accounting rules is likely to be a journey without an ending’. Discuss.AppendixLO1
Discuss both the framework of regulation and the framework of principles that help to shape the form and content of annual financial statements.AppendixLO1
Describe the responsibilities of directors and auditors concerning the annual financial statements provided to shareholders and others.AppendixLO1
What is a preference share? Compare the main features of a preference share with those of(a) an ordinary share; and(b) loan notes.AppendixLO1
What is a reserve? Distinguish between a revenue reserve and a capital reserve.AppendixLO1
Some people are about to form a company, as a vehicle through which to run a new business.What are the advantages to them of forming a private limited company rather than a public one?AppendixLO1
How does the liability of a limited company differ from the liability of a real person, in respect of amounts owed to others?AppendixLO1
The following is a draft set of simplified financial statements for Pear Limited for the year ended 30 September 2011.Income statement for the year ended 30 September 2011£000 Revenue 1,456 Cost of
discuss the framework of rules designed to safeguard the interests of shareholders;AppendixLO1
discuss the nature of the limited company;AppendixLO1
explain how the income statement and statement of financial position of a limited company differ in detail from those of sole proprietorships and partnerships.AppendixLO1
Comment on the following quote:Limited companies can set a limit on the amount of debts that they will meet. They tend to have reserves of cash, as well as share capital and they can use these
Comment on the following quotes:(a) ‘Bonus shares increase the shareholders’ wealth because, after the issue, they have more shares, but each one of the same nominal value as they had
Rose Limited operates a small chain of retail shops that sell high-quality teas and coffees.Approximately half of sales are on credit. Abbreviated and unaudited financial statements are as
Hudson plc’s outline statement of financial position as at a particular date was as follows:£m Net assets (assets less liabilities) 72 Equity£1 ordinary shares 40 General reserve 32 Total equity
Iqbal Ltd started trading on 1 January 2007. During the first five years of trading, the following occurred:Year ended 31 December Trading profit/(loss)£Profit/(loss) on sale of non-current
What is a preference share? Compare the main features of a preference share with those of(a) an ordinary share; and(b) loan notes.Review questions CHAPTER 4 Acc ounti ng for 166 limit ed companies
What is a reserve? Distinguish between a revenue reserve and a capital reserve.AppendixLO1
Briefly explain each of the following expressions that you have seen in the financial statements of a limited company:(a) dividend(b) audit fee(c) share premium account.Exercises Solutions to these
describe the main features of the equity (owners’ claim) in a limited company;AppendixLO1
How does the liability of a limited company differ from the liability of a real person, in respect of amounts owed to others?AppendixLO1
Some people are about to form a company, as a vehicle through which to run a new business.What are the advantages to them of forming a private limited company rather than a public one?AppendixLO1
(d) List the remaining balances in the same form as the opening balance sheet (above).
(c) Open an income statement (part of the double entry, remember). Make the necessary entries for the bulleted list above and the appropriate transfers to the income statement.
(b) Make entries to record the transactions 1 to 13 (above), opening any additional accounts as necessary.
● Depreciation to be taken at 20 per cent on the cost of the fittings owned at the year end.Buildings are not depreciated.Required:(a) Open ledger accounts and bring down all of the balances in the
● The borrowings carried interest of 10 per cent a year and was unpaid at the year end.
(c) Prepare an income statement for the month and a balance sheet at the month end. Assume that there are no prepaid or accrued expenses at the end of the month and ignore any possible
(a) Record the following transactions in a set of double-entry accounts:1 February Lee (the owner) put £6,000 into a newly-opened business bank account to start a new business 3 February Bought
In respect of each of the following transactions, state in which two accounts must an entry be made and whether the entry is a debit or a credit. (For example, if the transaction were buying
What does the balance on the income statement represent, and to where should it be transferred?
Why do you think the words ‘debtor’ and ‘creditor’ are used to describe those who owe money or are owed money by a business?
If we now separately total the debit balances and the credit balances, what should we expect to find?
● Write up a series of business transactions and balance the accounts.
(b) Should the business implement the proposed policy? Give reasons for your conclusion.
The business is considering whether to grant extended credit facilities to its customers. It has been estimated that increasing the settlement period for trade receivables by a further 20 days will
(b) Identify and discuss the factors that should be taken into account when evaluating the creditworthiness of the new business customers.Goliath plc is a retail business operating in Ireland. The
Delphi plc has recently decided to enter the expanding market for MP3 players. The business will manufacture the players and sell them to small TV and hi-fi specialists, medium-sized music stores and
(c) Advise the business as to whether it should implement the proposed policy.(Hint: The investment in working capital will be made up of inventories, trade receivables and cash, less trade payables
(b) Calculate the expected net profit for the forthcoming year under:(i) the existing policy;(ii) the proposed policy.
Boswell Enterprises Ltd is reviewing its trade credit policy. The business, which sells all of its goods on credit, has estimated that sales revenue for the forthcoming year will be £3m under the
The credit control department has proposed that customers should be given a 21/2 per cent discount if they pay within 30 days. For those who do not pay within this period, a maximum of 50 days’
Mayo Computers Ltd has an annual sales turnover of £20m. Bad debts amount to £0.1m a year.All sales made by the business are on credit, and, at present, credit terms are negotiable by the customer.
(c) Advise your general manager on the acceptability of the proposal. You should give your reasons and do any calculations you consider necessary. (Hint: To answer this question you must weigh the
(b) Describe the accounting controls that you would use to monitor the level of your business’s trade receivables.
Your superior, the general manager of Plastics Manufacturers Limited, has recently been talking to the chief buyer of Plastic Toys Limited, which manufactures a wide range of toys for young children.
(b) Discuss the ways in which the management of Sparkrite Ltd could exercise control over:(i) inventories levels;(ii) trade receivables levels.
The managing director of Sparkrite Ltd, a trading business, has just received summary sets of financial statements for last year and this year:Sparkrite Ltd Income statements for years ended 30
(e) Outline the controls and procedures that a business should adopt to manage the level of its trade receivables.16.2 650 EXERCISES
(d) Should the business go ahead with the scheme? State what other factors, if any, should be taken into account.
(c) How much will the scheme cost the business in discounts?
(b) Calculate the value of trade receivables outstanding under both the old and new schemes.
The credit controller anticipates that half of the customers who now take an average of 70 days to pay (that is, a quarter of all customers) will pay in 30 days. The other half (the final quarter)
(c) State what steps may be taken to improve the operating cash cycle of the business.International Electric plc at present offers its customers 30 days’ credit. Half the customers, by value, pay
(b) Calculate the operating cash cycle for Hercules Wholesalers Ltd based on the information above. (Assume a 360-day year.)
Hercules Wholesalers Ltd has been particularly concerned with its liquidity position in recent months. The most recent income statement and balance sheet of the business are as follows:Income
Identify the costs of holding:(a) too little cash;(b) too much cash.
What are the reasons for holding inventories? Are these reasons different from the reasons for holding cash?
(e) A deterioration in the quality and reliability of bought-in components.
(d) A switch of suppliers from an overseas business to a local business.
(c) A decision to offer customers a narrower range of products in the future.
(b) A rise in the level of interest rates.
Tariq is the credit manager of Heltex plc. He is concerned that the pattern of monthly cash receipts from credit sales shows that credit collection is poor compared with budget. Heltex’s sales
What do you think are the major factors that influence how much cash a business will hold? See if you can think of five possible factors.
Williams Wholesalers Ltd at present requires payment from its customers by the end of the month after the month of delivery. On average, customers take 70 days to pay. Sales revenue amounts to £4m a
Assume that you are the credit manager of a business and that a limited company approaches you with a view to buying goods on credit. What sources of information might you decide to use to help
An electrical retailer stocks a particular type of light switch. The annual demand for the light switch is 10,400 units, and the lead time for orders is four weeks. Demand for the light switch is
● Identify the main elements of working capital.
● Distinguish between fixed costs and variable costs and use this distinction to explain the relationship between costs, volume and profit.
Can you give some examples of costs that are likely to be fixed for a hairdressing salon?
Do fixed costs stay the same irrespective of the volume of output, even where there is a massive rise in that volume?
Do fixed costs stay the same irrespective of the volume of output, even where there is a massive rise in that volume?
Cottage Industries Ltd (see Example 9.1) expects to sell 500 baskets a month. The business has the opportunity to rent a basket-making machine. Doing so would increase the total fixed costs of
(a) How much profit would the business make each month from selling baskets(i) assuming that the basket-making machine is not rented and (ii) assuming that it is rented?
(b) What is the BEP if the machine is rented?
(c) What do you notice about the figures that you calculate?
Cottage Industries Ltd (see Example 9.1 on page 305) has spare capacity in that its basket makers have some spare time. An overseas retail chain has offered the business an order for 300 baskets at a
Going back to Activity 9.11, what is the maximum price that the business concerned would logically be prepared to pay to have the remaining B14s machined by a subcontractor, assuming that no fixed or
Would there be a different maximum if we were considering the B22s?
Shah Ltd needs a component for one of its products. It can subcontract production of the component to a subcontractor who will provide the components for£20 each. The business can produce the
What factors, other than the immediately financially quantifiable, would you consider
when making a make-or-buy decision?
In considering Goodsports Ltd (Example 9.4), we saw that the general clothes department should not be closed ‘without any other developments’. What ‘other developments’could affect this
Khan Ltd can render three different types of service (Alpha, Beta and Gamma) using the same staff. Various estimates for next year have been made as follows:Alpha Beta Gamma£/unit £/unit £/unit
(b) If the business has a maximum of 10,000 staff hours next year, in which order of preference would the three services come?
(c) If the maximum market for next year for the three services is as follows:
Alpha 3,000 units Beta 2,000 units Gamma 5,000 units what quantities of which service should the business provide next year and how much profit would this be expected to yield?
What is meant by the break-even point for an activity? How is the BEP calculated? Why is it useful to know the BEP?
If there is a scarce resource that is restricting sales, how will the business maximise its profit?
Explain the logic of the approach that you have identified for maximising profit.
The management of a business is concerned about its inability to obtain enough fully trained labour to enable it to meet its present budget projection for its three services, Alpha, Beta and
(b) What steps could the business take in an attempt to improve profitability, in the light of the labour shortage?CHAPTER 9 COST–VOLUME–PROFIT ANALYSIS
Lannion and Co. is engaged in providing and marketing a standard advice service. Summarised results for the past two months reveal the following:October November Sales (units of the service) 200 300

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