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financial accounting an introduction

Questions and Answers of Financial Accounting An Introduction

Prolog Ltd is a small wholesaler of high-powered computers for scientific research. It has in recent months been selling 50 machines a month at a price of £2,000 each. These machines cost £1,600
(b) State briefly what further information a banker would require from Prolog Ltd before granting additional overdraft facilities for the anticipated expansion of sales.Brown and Jeffreys, a West
Brown and Jeffreys assemble the Fuel Miser, but all three components are manufactured by local engineering businesses. The three components are codenamed A, B and C. One Fuel Miser consists of one of
● Finished inventories at the end of each month are to equal the following month’s total sales to retail outlets, and half the total of the following month’s sales to the motor manufacturer.
● Raw materials at the end of each month are to be sufficient to cover production requirements for the following month. The production for July will be 6,800 units.
● Suppliers of raw materials are to be paid during the month following purchase. The payment for January will be £21,250.
● Customers will pay in the month of sale, in the case of sales to the motor manufacturer, and the month after sale, in the case of retail sales. Retail sales during December were 2,000 units at
● Identify the main sources of regulation affecting the financial statements of limited companies.
● Discuss the framework of principles for accounting.
● Prepare an income statement, balance sheet and statement of changes in equity for a limited company in accordance with International Financial Reporting Standards.
● Explain the purpose of the segmental report and the operating and financial review and describe their main features.
● Discuss the threat posed by creative accounting to the quality of published financial statements.
UK, to develop a clear framework of principles that will guide us in the development of accounting. Such a framework should provide clear answers to such fundamental questions as:
● Who are the main users of financial statements?
● What qualities should financial information possess?
● What are the main elements of financial statements?
● How should these elements be defined, recognised and measured?
The following information was extracted from the financial statements of I. Ching (Booksellers)plc for the year to 31 December 2006:£m Interest payable 40 Cost of sales 460 Distribution costs 110
Prepare an income statement for the year ended 31 December 2006 that is set out in accordance with the requirements of IAS 1 Presentation of Financial Statements.
Manet plc had the following share capital and reserves as at 30 June 2006:£m Share capital (£0.25 ordinary shares) 250 Share premium account 50 Revaluation reserve 120 Currency translation reserve
Professor Myddleton argues that accounting standards should be limited to disclosure requirements and should not impose rules on companies as to how to measure particular items in the financial
The volume of accounting instructions is already high. If things go on like this, where will we be in 20 or 30 years time? On balance I conclude we would be better off without any standards on
Do you agree with this idea? Discuss. (Note: This issue has not been directly covered in the chapter, but you should be able to use your knowledge to try to come up with some points on both sides of
The following is the segment reports of Tora plc, which manufactures and sells three main classes of product, for the year ended 31 December 2006.Paper Plastic Metal Eliminations Consolidation£m £m
The following information has been extracted from the segmental report for 2006 of Carpetright plc, a leading carpet retailer.Segmental analysis The Group’s primary reporting segment is geographic,
● Explain the nature of the cash flow statement and discuss how it can be helpful in identifying cash flow problems.
● Prepare a cash flow statement.
● Interpret a cash flow statement.
How can we deduce the cash inflows from sales using the income statement and balance sheet for the business?
The typical business outside the service sector has about 50 per cent more of its resources tied up in inventories than in cash, yet there is no call for a ‘inventories flow statement’ to be
Taking each of the categories of the cash flow statement in turn, in which direction would you normally expect the cash flow to be? Explain your answer.(a) Cash flows from operating activities.(b)
6.4 What causes the profit for the year not to equal the net cash inflow?
The following information has been taken from the financial statements of Juno plc for last year and the year before last:Year before last Last year£m £m Operating profit 156 187 Depreciation
Torrent plc’s income statement for the year ended 31 December 2007 and the balance sheets as at 31 December 2006 and 2007 are as follows:Income statement£m Revenue 623 Cost of sales (353)Gross
Chen plc’s income statements for the years ended 31 December 2006 and 2007 and the balance sheets as at 31 December 2006 and 2007 are as follows:Income statement 2006 2007£m £m Revenue 207 153
The following are the financial statements for Nailsea plc for the years ended 30 June 2006 and 2007:Income statement for years ended 30 June 2006 2007£m £m Revenue 1,230 2,280 Operating expenses
The following financial statements for Blackstone plc are a slightly simplified set of published accounts. Blackstone plc is an engineering business that developed a new range of products in 2005.
3 Intangible assets represent the amounts paid for the goodwill of another engineering business acquired during the year.4 Proceeds from the sale of non-current assets in the year ended 31 March 2007
Income statement for the year ended 30 September 2007£m Revenue 290.0 Cost of sales (215.0)Gross profit 75.0 Operating expenses (Note 1) (62.0)Operating profit 13.0 Interest payable (Note 2)
1 Operating expenses include depreciation of £13m and a surplus of £3.2m on the sale of noncurrent assets.2 The expense and the cash outflow for interest payable are equal.3 A dividend of £3.5m
The balance sheets of Axis plc as at 31 December 2006 and 2007 and the income statement for the year ended 31 December 2007 were as follows:Balance sheet as at 31 December 2006 2007£m £m £m £m
During the year, plant (a non-current asset) costing £15m and with accumulated depreciation of £10m was sold.The short-term investments were government securities, where there was little or no risk
What do you deduce from the investment ratios set out above?
Can you offer an explanation why the share price has not fallen as much as it might have done, bearing in mind the very poor (relative to 2006) trading performance in 2007?
Some businesses operate on a low operating profit margin (for example, a supermarket chain).Does this mean that the return on capital employed from the business will also be low?What potential
I. Jiang (Western) Ltd has recently produced its financial statements for the current year. The directors are concerned that the return on capital employed (ROCE) had decreased from 14 per cent last
The following reasons were suggested as to why this reduction in ROCE had occurred:(i) an increase in the gross profit margin;(ii) a reduction in sales revenue;(iii) an increase in overhead
Conday and Co. Ltd has been in operation for three years and produces antique reproduction furniture for the export market. The most recent set of financial statements for the business is set out as
4 The directors have invited an investor to take up a new issue of ordinary shares in the business at £6.40 each making a total investment of £200,000. The directors wish to use the funds to
(b) State, with reasons, whether or not the investor should invest in the business on the terms outlined.
The directors of Helena Beauty Products Ltd have been presented with the following abridged financial statements:Helena Beauty Products Ltd Income statement for the year ended 30 September 2006
Income statements for the year ended 30 June 2006 2007£000 £000 Revenue 1,180 1,200 Cost of sales (680) (750)Gross profit 500 450 Operating expenses (200) (208)Depreciation (66) (75)Operating
(b) Comment on the performance of Threads Limited from the viewpoint of a business considering supplying a substantial amount of goods to Threads Limited on usual trade credit terms.
Bradbury Ltd is a family-owned clothes manufacturer based in the south west of England. For a number of years the chairman and managing director was David Bradbury. During his period of office, sales
(a) Calculate, for each year (using year-end figures for balance sheet items), the following ratios:(i) operating profit margin(ii) return on capital employed(iii) current ratio(iv) gearing ratio(v)
(b) Using the above ratios, and any other ratios or information you consider relevant, comment on the results of the expansion programme.
The financial statements for Harridges Ltd are given below for the two years ended 30 June 2006 and 2007. Harridges Limited operates a department store in the centre of a small town.Harridges Ltd
(a) Choose and calculate eight ratios that would be helpful in assessing the performance of Harridges Ltd. Use end-of-year values and calculate ratios for both 2006 and 2007.
(b) Using the ratios calculated in (a) and any others you consider helpful, comment on the business’s performance from the viewpoint of a prospective purchaser of a majority of shares.Genesis Ltd
In a preliminary report to the board of directors, the management consultants state: ‘Most of the difficulties faced by the business are symptoms of an underlying problem of overtrading.’The most
(b) Discuss the kinds of problem that overtrading can create for a business.
(c) Calculate and discuss five financial ratios that might be used to establish whether the business is overtrading.
(d) State the ways in which a business may overcome the problem of overtrading.
● Set out the analysis in a logical form so that the conclusion may be communicated to managers.
You own a motor car for which you paid a purchase price of £5,000 – much below the list price – at a recent car auction. You have just been offered £6,000 for this car.
What is the cost to you of keeping the car for your own use?
Assume exactly the same circumstances as in Activity 8.2, except that the garage is quite busy at the moment. If a mechanic is to be put on the engine-replacement job, it will mean that other work
HLA Ltd is in the process of preparing a quotation for a special job for a customer. The job will have the following material requirements:Material Units Units currently held in inventories required
What is the relevant cost of the materials for the job specified above?
JB Limited is a small specialist manufacturer of electronic components. Makers of aircraft, for both civil and military purposes, use much of its output. One of the aircraft makers has offered a
1 bought-in component (part number 678) (see Note 3 below)Note 1: Material M1 is in continuous use by the business; 1,000 kg are currently held by the business. The original cost was £4.70/kg, but
(ii) Labour requirements: Each component would require five hours of skilled labour and five hours of semi-skilled labour. A skilled employee is available and is currently paid £14/hour. A
(iii) General manufacturing costs: It is JB Limited’s policy to charge a share of the general costs (rent, heating and so on) to each contract undertaken at the rate of £20 for each machine hour
(b) What other factors ought management to consider that might influence the decision?
8.4 What is meant by the expression ‘committed cost’? How do committed costs arise?
Lombard Ltd has been offered a contract for which there is available production capacity. The contract is for 20,000 identical items, manufactured by an intricate assembly operation, to be produced
The local authority of a small town maintains a theatre and arts centre for the use of a local repertory company, other visiting groups and exhibitions. Management decisions are taken by a committee
(b) What other factors may have a bearing on the decision by the committee?Andrews and Co. Ltd has been invited to tender for a contract. It is to produce 10,000 metres of an electrical cable in
● Materials: The cable will require a steel core, which the business buys in. The steel core is to be coated with a special plastic, also bought in, using a special process. Plastic for the
● Direct labour. Skilled: 10 minutes/metre Unskilled: 5 minutes/metre
The business already holds sufficient of each of the materials required to complete the contract. Information on the cost of the inventories is as follows:Steel core Plastic£/metre £/kg Historic
SJ Services Ltd has been asked to quote a price for a special contract to render a service that will take the business one week to complete. Information relating to labour for the contract is as
A business in the food industry is currently holding 2,000 tonnes of material in bulk storage. This material deteriorates with time, and so in the near future it needs to be repackaged for sale or
A local education authority is faced with a predicted decline in the demand for school places in its area. It is believed that some schools will have to close in order to remove up to 800 places from
● School A (capacity 200) was built 15 years ago at a cost of £1.2m. It is situated in a ‘socially disadvantaged’ community area. The authority has been offered £14m for the site by a
● School B (capacity 500) was built 20 years ago and cost £1m. It was renovated only two years ago at a cost of £3m to improve its facilities. An offer of £8m has been made for the site by a
● School C (capacity 600) cost £5m to build five years ago. The land for this school is rented from a local business for an annual cost of £300,000.
● School D (capacity 800) cost £7m to build eight years ago. Last year £1.5m was spent on an extension. The school has considerable grounds, which are currently used for sporting events. This
In the accounting system, the local authority depreciates non-current (fixed) assets based on 2 per cent a year on the original cost. It also differentiates between one-off, large items of capital
Show separately the one-off effects and annually recurring items, rank the options open to the local authority, and briefly interpret your answer. (Note: Various approaches are acceptable provided
(b) Identify and comment on any two different types of irrelevant cost contained in the information given in the question.
(c) Discuss other factors that might have a bearing on the decision.Rob Otics Ltd, a small business that specialises in building electronic-control equipment, has just received an order from a
As part of the costing exercise, the business has collected the following information:
● Component X. This item is normally held by the business as it is in constant demand. The 10 units currently held were invoiced to Rob Otics at £150 a unit, but the sole supplier has announced a
● Component Y. 25 units are currently held. This component is not normally used by Rob Otics but the units currently held are because of a cancelled order following the bankruptcy of a customer.
● Component Z. This is in regular use by Rob Otics. There is none in inventories but an order is about to be sent to a supplier for 75 units, irrespective of this new proposal. The supplier charges
● Other miscellaneous items. These are expected to cost £250 in total.Assembly labour is currently in short supply in the area and is paid at £10 an hour. If the order is accepted, all necessary
(b) Identify any other factors that you would consider before fixing the final price.A business places substantial emphasis on customer satisfaction and, to this end, delivers its product in special
(ii) The annual labour cost is £80,000 for this department; however, most are casual employees or recent starters, and so, if an outside quote were accepted, little redundancy would be payable.
(iii) The department manager has a salary of £30,000 a year. The closure of this department would release him to take over another department for which a vacancy is about to be advertised. The

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