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financial accounting an introduction

Questions and Answers of Financial Accounting An Introduction

We have learnt how to prepare a bank reconciliation statement.
We have learnt how to report the bank balance in the annual financial statements.
1. The R500 will be debited to Inventory and credited to the Trade payables account in the general ledger. Ruby Wholesalers account in the subsidiary ledger will be increased by R500.
2. The amount (R500) will appear as a credit on the May statement from Ruby Wholesalers.
Understand why a business would sell on credit
Record credit transactions between a business and its customers (debtors)
Understand why an accounting system that records transactions with each customer individually is needed
Maintain a Trade receivable subsidiary ledger and extract a list of debtor balances
Prepare a reconciliation between the trade receivable account in the general ledger and the total of the list of debtor balances
Prepare the transactions to record bad debts (with VAT)
Identify the components of net working capital
Understand why working capital management is important for a business.
1. Debtors or Trade receivables. This textbook will use the term "Trade receivables" when referring to all the debtors, and the term "debtor" when referring to an individual customer.
2. Sales or Trade receivable Journal.
1. Jason assumed the customer would NOT take advantage of the discount, but he then received the payment within the settlement period. How should Jason record the payment?
2. How would the customer record the transaction if he made the same assumption?
We have learnt why businesses offer credit to customers.
We know how to record sales credit transactions in specialised journals.
We have learnt how to post credit transactions from the specialised journals to the Trade receivable account in the general ledger.
We know how to prepare the trade receivable subsidiary ledgers.
We have learnt how to account for VAT on sales credit transactions.
We have learnt how to account for VAT on bad debts.?
We have learnt how to identify the components of net working capital?
We have learnt why working capital management is important for a business?1. Correct the Trade Receivables account in the general ledger.2. Correct the debtors list to reconcile the balance in the
Understand what is meant by the term "property, plant and equipment"
Know when to record the purchase and disposal of property, plant and equipment
record the purchase and disposal of property, plant and equipment
Understand what is meant by the term "depreciation" and how to calculate and record depreciation
Understand when and how to adjust the carrying value of property, plant and equipment for changes in value that occur after the assets have been purchased (revaluation and impairment)
Record further expenditure that may be incurred on items of property, plant and equipment once they have been purchased
Calculate and disclose the effects of a change in estimate used when calculating the depreciation charge
Present information about the property, plant and equipment in the annual financial statements in terms of generally accepted accounting practice.
Understand that accounting for properties that are held as investments may be different than accounting for PPE.
We record the purchase of an asset and subsequent expenditure in the asset account.
We record the revaluation of an asset in the asset account.
We record the reduction of the asset due to the loss of future economic benefits, impairment of the asset, in the Accumulated Impairment account (negative asset).
We record the reduction of the asset due to use in the Accumulated Depreciation account (negative asset).
We know why only certain assets can be included in the asset classification of property, plant and equipment.
We know when and how to recognise, measure and record the cost of property, plant and equipment, including subsequent expenditure.
We know what expenditure can be included in the cost of the item of property, plant and equipment.
We have learnt how to recognise, measure, record and disclose increases and decreases in the value of the property, plant and equipment that occur after the initial recording of the asset.
We know why we depreciate an asset and how to calculate and record depreciation.
We know how to record the disposal of property, plant and equipment.
We have learnt what information about property, plant and equipment needs to be presented to the users of the financial statements.
We know about some control systems for property, plant and equipment.
We know that accounting for properties that are held as investments may be different from the usual procedure.
C1.2 Explain how you would class each of the following – as a sole trader, partnership or limited company. List any further questions you might ask for clarification about the nature of the
C1.1 The following extracts are typical of the annual reports of large listed companies. Which of these extracts satisfy the definition of ‘accounting’? What are the user needs that are most
(c) Which scheme would you advise the business to adopt? You should give your reasons and state what additional information you would require.
(b) Calculate Telford’s projected earnings per share for Year 10 for both schemes.
Telford Engineers plc, a medium-sized Midlands manufacturer of automobile components, has decided to modernise its factory by introducing a number of robots. These will cost £20m and will reduce
Gainsborough Fashions Ltd operates a small chain of fashion shops in North Wales. In recent months the business has been under pressure from its suppliers to reduce the average credit period taken
(c) Identify and evaluate, at the time of the rights issue, each of the options arising from the rights issue to an investor who holds 4,000 ordinary shares before the rights announcement.(Hint: To
(b) Calculate the price at which the rights in Carpet Direct plc are likely to be traded.
Carpets Direct plc wishes to increase the number of its retail outlets in the south of England. The board of directors has decided to finance this expansion programme by raising the funds from
(b) Briefly assess both of the financing schemes under consideration from the viewpoint of the existing shareholders.
Russell Ltd installs and services heating and ventilation systems for commercial premises. The business’s most recent balance sheet and income statement are as follows:Balance sheet£000 £000
Raphael Ltd is a small engineering business that has annual sales revenue of £2.4m, all of which is on credit. In recent years, the business has experienced credit control problems. The average
(b) What information, other than that provided in the question, is needed before the board can make the investment decision?
Brocmar plc has 10m ordinary £0.50 shares in issue. The market price of the shares is £1.80.The board of the business wishes to finance a major project at a cost of £2.88m. Forecasts suggest that
(d) From the business’s viewpoint, how critical is the pricing of a rights issue likely to be?
(c) Explain why rights issues are usually made at a discount.
(c) Identify three conditions that might be included in a long-term loan agreement, and state the purpose of each.Devonian plc has the following equity as at 30 November Year 4:£m Ordinary shares
(b) Discuss the major factors that a lender should take into account when deciding whether to grant a long-term loan to the business.
H. Brown (Portsmouth) Ltd produces a range of central heating systems for sale to builders’merchants. As a result of increasing demand for the business’s products, the directors have decided to
15.4 Distinguish between invoice discounting and factoring.
Some businesses may take up a less cautious financing position than that shown in Figure 15.10, and others may take up a more cautious one. How would the diagram differ under each of these options?
What would your views of the proposed schemes be in each of the following circumstances?(a) If you were an investor who had been asked to take up some of the loan notes.(b) If you were an ordinary
Both preference shares and loan notes are forms of finance that require the business to provide a particular rate of return to investors. What are the factors that may be taken into account by a
Would you expect the returns to loan capital to be higher or lower than those of preference shares?
(b) Calculate the net present value (NPV) of the worst possible outcome and the probability of its occurrence.
Kernow Cleaning Services Ltd provides street-cleaning services for local councils in the far south west of England. The work is currently labour intensive and few machines are employed.However, the
Simtex Ltd has invested £120,000 to date in developing a new type of shaving foam. The shaving foam is now ready for production and it has been estimated that the new product will sell 160,000 cans
(d) Discuss the validity of using the net present value method in making investment decisions for a professional football club.14.6 564 EXERCISES
(c) On the basis of the calculations made in (b) above, which of the two options would you choose and why?
(b) Calculate the net present value of each of the options.
The second option is for the club to improve its ground facilities. The west stand could be extended and executive boxes could be built for businesses wishing to offer corporate hospitality to
Assuming ‘Bazza’ Ramsey is acquired, the team manager estimates that gate receipts will increase by £2.5m in the first year and £1.3m in each of the four following years. There will also be an
Chesterfield Wanderers is a professional football club that has enjoyed considerable success in both national and European competitions in recent years. As a result, the club has accumulated£10m to
(c) State what you consider to be the most suitable option, and why.
(b) Identify and discuss any other factors that Newton Electronics Ltd should consider before arriving at a decision.
3 Newton Electronics Ltd could sell the patent rights to Faraday Electricals plc for £24m, payable in two equal instalments. The first instalment would be payable immediately and the second at the
2 Newton Electronics Ltd could agree to another business manufacturing and marketing the product under licence. A multinational business, Faraday Electricals plc, has offered to undertake the
vNewton Electronics Ltd has incurred expenditure of £5m over the past three years researching and developing a miniature hearing aid. The hearing aid is now fully developed, and the directors are
(c) Compute the payback period to the nearest year. Explain the meaning of this term.
(b) Compute the net present value of the project using a 10 per cent discount rate.
Arkwright Mills plc is considering expanding its production of a new yarn, code name X15. The plant is expected to cost £1m and have a life of five years and a nil residual value. It will be bought,
● The cost of equipment contains £100,000, being the carrying (balance sheet) value of an old machine. If it were not used for this project it would be scrapped with a zero net realisable value.
The accountant of your business has recently been taken ill through overwork. In his absence his assistant has prepared some calculations of the profitability of a project, which are to be discussed
(d) Explain why cash flow forecasts are used rather than profit forecasts to assess the viability of proposed capital expenditure projects.
(c) State, with reasons, whether the business should purchase the new equipment.
(b) Calculate the net present value of the proposed purchase of new equipment.
C. George (Controls) Ltd manufactures a thermostat that can be used in a range of kitchen appliances. The manufacturing process is, at present, semi-automated. The equipment used costs £540,000, and
(c) State, in general terms, which method of investment appraisal you consider to be most appropriate for evaluating investment projects, and why.
The directors of Mylo Ltd are currently considering two mutually exclusive investment projects.Both projects are concerned with the purchase of new plant. The following data are available for each
● Have risk and inflation been taken into account in the appraisal process and, if so, what are the results?
● What is the NPV of the project? How does this compare with other opportunities available?
● What are the major problems associated with the project and how can they be overcome?
● What is the expected pattern of cash flows?
● How long will the project last and what are its key stages?

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