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financial accounting an introduction

Questions and Answers of Financial Accounting An Introduction

(iv) A rental charge of £9,750 a year, based on floor area, is allocated to the containers department.If the department were closed, the floor space released would be used for warehousing and, as a
(v) The plant cost £162,000 when it was bought five years ago. Its market value now is £28,000 and it could continue for another two years, at which time its market value would have fallen to zero.
● How many garages shall we telephone or visit?
● What is the cost of each telephone call?
● How long will it take to make all the telephone calls or visits?
● How much do we value our time?
The economic benefit of having the information on the price of the service is probably even harder to assess – remember that we have not contacted any garages yet. The following points need to be
● How likely is it that we shall be quoted a price cheaper than £250?
The changing business environment has given added impetus to the search for a clear framework and principles upon which to base financial accounting reports.Various attempts have been made to clarify
● How should items be measured?
Identify the main users of accounting information for a university. Do these users differ very much from the users of accounting information for private-sector businesses? Is there a major difference
● Prepare a simple balance sheet and interpret the information that it contains.
● Discuss the accounting conventions underpinning the balance sheet.
● Discuss the limitations of the balance sheet in portraying the financial position of a business.
● What cash movements (that is, cash in and cash out) took place over a particular period?
● How much wealth (that is, profit) was generated, or lost, by the business over that period? (Profit (loss) is defined as the increase (decrease) in wealth arising from trading activities.)
● What is the accumulated wealth of the business at the end of that period and what form does the wealth take?
An accountant prepared a balance sheet for a business. In the balance sheet, the capital of the owner was shown next to the liabilities. This confused the owner, who argued: ‘My capital is my major
On Thursday, the fourth day of his business venture, Paul, the street trader in wrapping paper(see earlier in the chapter, page 38), bought more inventories (stock) for £53 cash. During the day he
While on holiday in Bridlington, Helen had her credit cards and purse stolen from the beach while she was swimming. She was left with only £40, which she had kept in her hotel room, but she had
On 1 March, Joe Conday started a new business. During March he carried out the following transactions:1 March Deposited £20,000 in a bank account.2 March Bought fixtures and fittings for £6,000
The following is a list of the assets and claims of Crafty Engineering Ltd at 30 June last year:£000 Trade payables 86 Motor vehicles 38 Long-term loan from Industrial Finance Co. 260 Equipment and
The balance sheet of a business at the start of the week is as follows:£ £Assets Claims Property 145,000 Capital 203,000 Furniture and fittings 63,000 Short-term borrowing (bank overdraft) 43,000
The following is a list of assets and claims of a manufacturing business at a particular point in time:£Short-term borrowing 22,000 Property 245,000 Inventories of raw materials 18,000 Trade
● Prepare an income statement from relevant financial information.
Suppose the 9,000 tonnes of inventories in Example 3.8 were sold for £15 per tonne.(a) Calculate the gross profit for the period under each of the three methods.
(b) What observations concerning the portrayal of financial position and performance can you make about each method when prices are rising?
Assume that prices in Activity 3.10 are falling rather than rising. How would your observations concerning the portrayal of financial performance and position be different for the various costing
When preparing the financial statements, what would be the effect on the income statement and on the balance sheet, of not taking into account the fact that a debt is bad?
‘Although the income statement is a record of past achievement, the calculations required for certain expenses involve estimates of the future.’ What is meant by this statement? Can you think of
3.4 ‘An asset is similar to an expense.’ Do you agree?
You have heard the following statements made. Comment critically on them.(a) ‘Capital only increases or decreases as a result of the owners putting more cash into the business or taking some
During 2007, the following transactions took place:1 The owners withdrew capital in the form of cash of £20,000.2 Premises continued to be rented at an annual rental of £20,000. During the year,
The following is the income statement for Nikov and Co. for the year ended 31 December 2006, along with information relating to the preceding year.Income statement for the year ended 31 December 2006
● Explain the role of directors of limited companies.
● Explain how the income statement and balance sheet of a limited company differ in detail from that of sole proprietorships and partnerships.
The initial capital requirement for a new company is £50,000. There are to be two equal shareholders. Would you advise them to issue two shares of £25,000 each? Why?
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?
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
Iqbal Ltd started trading on 1 January 2002. During the first five years of trading, the following occurred:Year ended Trading profit/ Profit/(loss) on sale of Upward revaluation of 31 December
Da Silva plc’s outline balance sheet 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 72 The directors
Presented below is a draft set of simplified financial statements for Pear Limited for the year ended 30 September 2006.Income statement for the year ended 30 September 2006£000 Revenue 1,456 Cost
Balance sheet as at 30 September 2006£000 Non-current assets Property, plant and equipment Cost 1,570 Depreciation (690)880 Current assets Inventories 207 Trade receivables 182 Cash at bank 21 410
1 Depreciation has not been charged on office equipment with a carrying amount of £100,000.This class of assets is depreciated at 12 per cent a year using the reducing balance method.
2 A new machine was purchased, on credit, for £30,000 and delivered on 29 September 2006 but has not been included in the financial statements. (Ignore depreciation.)
3 A sales invoice to the value of £18,000 for September 2006 has been omitted from the financial statements. (The cost of sales figure is stated correctly.)
4 A dividend of £25,000 had been approved by the shareholders before 30 September 2006, but was unpaid at that date. This is not reflected in the financial statements.
5 The interest payable on the debenture for the second half-year was not paid until 1 October 2006 and has not been included in the financial statements.
6 An allowance for receivables is to be made at the level of 2 per cent of receivables.
7 An invoice for electricity to the value of £2,000 for the quarter ended 30 September 2006 arrived on 4 October and has not been included in the financial statements.
8 The charge for taxation will have to be amended to take account of the above information.Make the simplifying assumption that tax is payable shortly after the end of the year, at the rate of 30 per
Income statement for the year ended 30 June 2006£000 Revenue 1,850 Cost of sales (1,040)Gross profit 810 Depreciation (220)Other operating costs (375)Operating profit 215 Interest payable (35)Profit
Income statement for the year ended 31 March 2006£000 Revenue 12,080 Cost of sales (6,282)Gross profit 5,798 Labour costs (2,658)Depreciation (625)Other operating costs (1,003)Operating profit 1,512
Since the unaudited financial statements for Rose Limited were prepared, the following information has become available:1 An additional £74,000 of depreciation should have been charged on fixtures
Explain why the Companies Acts require a company to disclose the following information:(a) political and charitable contributions(b) directors' emoluments(c) depreciation(d) auditors' remuneration(e)
The scope of the auditor should be extended to commenting on the performance of management.' Do you agree?
'The development of disclosure should be left to the Stock Exchange and theaccounting profession?' Do you agree?
'Firms should be obliged to disclose their plans for the next ten years.' Discuss.
'More disclosure of information about firm's activities will prove a disincentive to new development of private enterprise?' Do you agree?
(i) Identity specifically what information you could require from a limited liability company if you were:(a) an ordinary shareholder(b) a preference shareholder(c) a secured creditor (fixed
What to you understand by the following terminology?Disclosure Stewardship Market economy Accounting information Audit Standard of accounting practice Accountability Social audit profit forecasts
The following are balance sheets of Peter Ltd and Paul Ltd. Peter owns 60% of the shares of Paul, the shares being purchased on 31 December 19XO:Balance sheets at J 1 December 19XO Peter Paul£
Analyses the performance of Marks & Spencer Ltd, using the data in App. D. What additional information would you like to have?
Calculate measures of return on investment that you consider useful for Mr Illingworth's firm in Ex. 9.3.
What are the best measures for the following?(a) liquidity(b) effective use of floor space in a retail company(c) the performance of a division of a company(d) profitability, where the owner owns all
The following is the balance sheet of Pickle Co. Ltd at 31 December 19XO:Balance Sheet as at 31 December 19XO Fixed Assets Machine less accumulated depreciation Current Assets Inventory Debtors Lell:
What do you understand by the following terminology?A pyramid of ratios Return on investment Return on assets Accounting rate of return Return on capital employed Return on finance employed Earnings
'The numbers in variances are oflittle use to managers unless they reflect the opportunity cost (or benefit) of actual decisions taken during the budget period which were not budgeted'. Discuss.
Variances may be partly due to omissions of important data by the forecaster, partly due to changes in the firm's environment and partly due to factors which can be controlled by the firm. What
To what extent is the analogy of a boiler and thermostat a useful representation of a budgetary control system?
'The causes of variances can be explained in terms of controllable and noncontrollable at various levels of the organisation.' Discuss.
'The use of budgets for planning is a form of ex ante control.' Explain and analyse this statement.
Job No. 674 on an assembly line has been observed to have a mean time often hours, with a standard deviation of one hour. This information was collected by the workstudy department during the past
'A firm should minimise its variances from budget at all costs.' Discuss.
What do you understand by the following terminology?Budgetary control Variance Ex post control Responsibility structure Ex ante control Variance analysis Indicative variance Flexible budgets Standard
What relevance has an understanding of employee motivation in the design of a control system?
What problems does the difficulty of making accurate forecasts pose for control in a firm?
What do you think are the problems of operating financial control in a firm?
Using the concepts of control illustrated in this chapter, discuss the systems of control that operate on and by an individual.
What to you understand by the following terminology?Internal control External control Financial control Budgetary control Feedback Ex post control Ex ante control Responsibility Controllability Delay
Is last year's budget of any use in the preparation Of the current budget?
A sales manager plans to launch a new product next month, but he is informed by the production manager that as it is not in the firm's budget dlat it is not possible. How would you resolve this
'Participation in budgeting is a genuine attempt at democratisation of a firm's organisation.' Do you agree?
'B udgeting in cyclical or seasonal industries poses severe problems.' What are tllese problems?
'All forecasts are speculative and thus budgeting in an uncertain world is pointless?'Do you agree? How can budget data be made useful if tlle underlying data is unreliable?
How would you overcome the problems of inflation in the budget data?
What problems do you foresee in budgeting in the following types of organisations:(a) a steel-manufacturing company(b) a market research agency(c) a polytechnic(d) a local authority(e) a greengrocer
What problems do you foresee in budgeting for:(a) direct labour and direct materials(b) heating and lighting(c) rent and rates(d) cash(e) research and development(j) sales
What are the objectives ofbudgeting? Explain any difficulties which may arise in attaining these objectives.
What do you understand by the following terminology?Planning horizon Budgeting Plans Relevant data Budgets Simulation models Functions Participation Projects Goal congruence Targets and forecasts
The Latham Co. Ltd, which has an annual sales turnover of £1 million, is considering buying a new machine at a cost of £5000. It is expected that the machine would reduce production costs by £
Discuss the major risks that might be met in:(a) the marketing of a new product(b) the purchase of a computer(e) the production and marketing of nuclear power.
In 1952 the Lawther Co. Ltd issued 4% Debentures (1982). Mr Little bought some of these Debentures in 1973 at 60p each when they had nine years to go to redemption and when similar Debentures were
A firm requires a return of 12% on investtnents and is considering whether to invest£ 18,000 in new equipment with an expected economiclife offour years. Cash inflows are expected to be £7000 in
Discuss the problems of identifying and quantifYing the costs and henefits of:(a) the purchase of shares in a company(b) the purchase of a whole firm(c) a firm's purchase of additional factory
Is it possible to distinguish between short-term and long-term decisions?
What do you understand by the following terminology?Investment project Yield I ndependent projects Rate of discount Mutually exclusive projects Cost of finance Time preference Payback Discounted cash
The Katto Co. is considering its production plan for the next month for two products, X and Y. B'lth products use some of the firm's manufacturing and bottling capacity which would otherwise be
The Kendo Co. uses machinery in its manufacturing processes. You have been asked to calculate the costs to the firm of the use of various machines during the next month:Machine A(j) Net book value:

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