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financial accounting for decision makers

Questions and Answers of Financial Accounting For Decision Makers

• use the indirect and direct methods to calculate cash flows from operations
• classify activities affecting cash as operating, investing and financing activities
• understand corporate liquidity and the factors that drive it
• consider how transparency in corporate reporting may enhance the value of an enterprise in the long run.
18.1 The existing conceptual framework of the accounting standards needs to be revisited to reflect the needs of all stakeholders for non-financial and forwardlooking information. Discuss.
17.3 Corporate reporting should be determined by the needs of investors, but fortunately there is a large overlap between investors’ needs and other stakeholders’.Moreover, modern technology will
17.2 Expectations about corporate governance reform need to be managed. Good corporate governance is not an insurance policy against fraud. Even very vigilant company directors, credit-rating
17.1 ‘To get reliable access to international financial markets and to regain investors’confidence, big companies in Italy and other European countries shaken by corporate scandals need to adopt
• understand the role played in this process by all the participants in the financial reporting supply chain.
• identify and analyse the causes of the loss of credibility in corporate reporting
• understand what corporate governance is and how it is linked to corporate reporting
6. Do you think that the market recognises and rewards the softer dimension of Halma? How?
5. How can you relate non-financial indicators and measures to financial ones to explain the success of Halma?
4. Whilst the importance of non-financial drivers is well understood, they are often hard to measure. How should we measure the ‘softer’ dimensions of Halma’s performance?
3. ‘Under Halma’s strategy, each operating division keeps track of eight items of financial information . . .’ Of these eight items, three relate to the income statement and one to the balance
2. Referring to those elements, are there any performance indicators which tell us whether value is being created?
1. Long-lasting quality of its products, contacts with its customers, focus on intellectual rather than physical assets, and tighter international legislation over health and safety are key issues in
17.4 Corporate reporting plays an important role in investors’ decisions but there needs to be recognition of the importance of other sources of information such as direct experience of the
17.5 There is no other effective way of ensuring that reporting is comparable and meets users’ needs than regulation. Without regulation there is no comparability, and bad reporting drives out
18.2 Corporate reporting cannot achieve transparency. In fact, transparency in corporate reporting is significantly constrained by considerations of cost, competition, confidentiality and litigation.
18.3 Information is the lifeblood of the capital markets. Investors risk their hardearned capital in the markets, and they rely on information they receive from enterprises in making their investment
• illustrate the weakness of the current reporting practices
18.4 ‘Economies are increasingly based on knowledge . . . what is new is that a growing chunk of production in the modern economy is in the form of intangibles, based on the exploitation of ideas,
18.5 For the efficient functioning of market economy, reliable, timely and transparent financial information is indispensable not only for the shareholders but for all other stakeholders. Discuss.
18.6 Assets like leadership, talent and speed cannot be valued. Discuss.
• comment on how regulators and stakeholders have responded to the crisis in corporate reporting
• describe the key elements that create public trust in capital markets
3. Parmalat’s CEO was the dominant shareholder. What checks and balances should exist in quoted companies to ensure proper corporate governance?
2. What transatlantic similarities in corporate scandals exist other than the fallibility of auditors?
1. What lessons do you draw from the scandal at Europe’s largest dairy-products group?
17.6 Efforts to strengthen and improve corporate governance around the world are ineffective without the cooperation of those involved in the production of financial information. Discuss.
16.6 Find on the Internet the share price of adidas-Salomon at the end of 2004.Then referring to the data reported in the case study in Chapter 13, determine five stock-market-related ratios. Compare
• use liquidity ratios, including working capital ratios, to assess an enterprise’s ability to meet its current obligations
• understand how the deductibility of interest expense may make the use of debt less costly than the issue of new shares.
• subdivide ROTA and ROE into their components
• distinguish between shareholders’ return and return on the total resources available to an enterprise
• understand what return on investment is and how it can be calculated and interpreted
Refer to the financial statements of adidas-Salomon for 2000–2004 for the case study in Chapter 13.Questions:1. Analyse adidas-Salomon’s short-term liquidity for the years 2002–2004.2. Analyse
14.6 Refer to Table 3.8 Consolidated balance sheet of Puma as at 31 December 2004, Table 4.4 Puma management income statement for 2004 and Table 12.1 Puma consolidated cash flow statement for the
14.1 Precious Toys Ltd wrote off EUR 100,000 of obsolete inventory at 31 December 2004. What effect did this write-off have on the company’s 2004 current and quick ratios?
14.5 On 1 January 2004 Amit & Frances Co’s inventory was EUR 400,000. During 2004 the company purchased EUR 1,900,000 of additional inventory, and on 31 December 2004 the total inventory was EUR
14.4 An extract from the financial statements of a wholesaler for the years ended 31 December 2004 and 2003 follows (amounts in thousands of euro):Balance sheet data As at 31 December 2004 2003 Trade
14.3 Lollo’s inventory and other related accounts for the year ended 31 March 2005 follow:Sales EUR 6,000,000 Cost of sales EUR 4,400,000 Inventory as at 31 March 2005 EUR 1,200,000 How many times
14.2 Melissa SpA has current assets of EUR 90,000 and current liabilities of EUR 180,000.Compute the effect of each of the following transactions on Melissa’s current ratio:(a) Refinancing a EUR
• use debt ratio to analyse an enterprise’s financial structure.
15.1 Which measures of operating performance are combined to give ROTA?
15.2 ‘The tax law discriminates against share capital but favours debt.’ Do you agree? Explain why.
16.5 Find on the Internet the share price of Puma at the end of 2004. Then referring to Table 13.1 and Table 13.3 determine five stock-market-related ratios.
16.4 L.J. Pathmark reported net profit of EUR 250,000 for 2005. The company had 125,000 ordinary shares of EUR 1 and 30,000 convertible preference shares of EUR 40 outstanding during the year. The
16.3 The issued and fully paid share capital of Angli Inc remained unchanged at the following amounts since the date of incorporation until the financial year ended 31 March 2004:• 1,200,000
16.2 In connection with IAS 33 – Earnings per Share:(a) Define the earnings figure used to determine basic and diluted EPS.(b) Explain the relationship between EPS and the PE ratio. Why is the PE
16.1 Explain:(a) basic earnings per share(b) diluted earnings per share(c) potential ordinary shares(d) limitation of EPS as a performance measure.
• determine the main stock-market-related ratios.
• use the PE ratio to decide whether the shares are currently overor undervalued
• calculate basic and diluted EPS under different circumstances
• understand why earnings per share figure is important and how it is used by shareholders
15.6 One of your main suppliers of raw materials is a family-owned company. It is the only available supplier and your company purchases 60 per cent of its output from it. Currently, it requires
15.5 Oltre il Giardino SpA, a medium-sized listed company, is considering two schemes to finance its next expansion.1. The first is to raise EUR 8 million by means of a long-term loan from its
15.4 Casa Comfort is a leading retailer in the home improvement industry. Certain data from its financial statements for the years ended 31 March 2004 and 31 March 2005 follow (euro in millions):2005
15.3 As the manager of Lene division of Elenia SpA, you are interested in determining the division’s return on investment. As division manager you have no control over financing assets, but you
• explain why financial accounting is important
• identify the main forms of business enterprise
• identify and discuss the main objectives of an enterprise
• identify the main users of financial information and their needs.
1.1 Why does financial accounting matter?
1.2 Think of the various groups of users of financial information. Suggest the information that each is likely to need from accounting statements and reports.Are there likely to be difficulties in
1.3 Outline the relative benefits to users of financial reports relating to:(a) information about the past(b) information about the present(c) information about the future.
1.4 In the context of your own national background, rank the nine ‘external’ user groups suggested in the text (i.e. omitting managers) according to the priority that you think should be given to
1.5 Compare your answer to the previous question with the answers of students of different national backgrounds to yours. Explore the likely causes of any major differences that emerge, in terms of
1.6 Read the mission statements reported in Figure 1.1. Explain how the objectives of enterprises described in section 1.5 are linked to those mission statements.
• explain what drives the international convergence of accounting standards
• explain the main purposes of financial reporting
• outline fundamental concepts underlying all financial reporting
• define concepts/conventions to be found in the IASB Framework
• explain the various levels of concepts, their interrelationship and inconsistencies.
2.3 What various purposes might there be for accounting? Which purpose does the IASB particularly focus on?
2.5 To what extent is the search for relevance of financial information hampered by the need for reliability?
2.6 ‘Accounting information should be understandable. As some users of accounting information have a poor knowledge of accounting, we should produce simplified financial reports to help them.’ To
• understand the relationships between these statements
• prepare a balance sheet and interpret the information it contains
• discuss the accounting conventions underpinning a balance sheet
• calculate some ratios relating to a balance sheet.
3.1 Luca has just enrolled in the first year of a General Management degree programme. He has decided to sell his books used in high school. He thinks all his books are worth EUR 300.On the first
3.2 XYZ’s balance sheet as at 31 December 2004 had the following items (arranged here in random order):EUR EUR Trade payables 5,000 Financial assets 1,500 Trade receivables 7,000 Other current
3.3 On 1 February 2005, Marco started a new business. During February he carried out the following transactions:1 February: deposited EUR 40,000 in a bank account 2 February: purchased office
3.4 Lory & Co’s balance sheet as at 31 December 2004 included the following accounts (arranged here in random order):(a) Prepare a balance sheet of PB Ltd as at 31 December 2004 from the
3.7 Refer to Table 3.8 – Consolidated balance sheet of Puma as at 31 December 2004.Prepare an alternative presentation of the Puma balance sheet.
1. Prepare the balance sheets as at 1 July and as at 31 July.
2. Comment on how the financial condition as at the end of July compared with that at the beginning of July.
3. Why do retained earnings not increase by the amount of July net profit?
4. At the end of July, do you consider that Diletta Ferrari enterprise is worth the amount of its owners’ equity, EUR 619,446? Explain.
• discuss the nature and purpose of an income statement
• discuss the main measurement issues that should be considered when preparing an income statement
• explain the main accounting conventions underpinning an income statement
• understand what gross profit margin and profit margin are.
4.1 Analyse the following transactions incurred in 2004 and prepare an income statement for the period:1. Capital was issued for EUR 100,000 cash.2. Depreciation for plant and equipment amounted to
4.2 The balance sheet of the Marvin Company as at 1 January follows:Assets Owner’s equity and liabilities EUR EUR Inventory 50,000 Capital 55,000 Cash 25,000 Short-term borrowings 20,000 Total
4.3 Ziggy Ltd starts trading on 1 January 2003. Rent details are as follows:Invoice paid Period EUR 02.04.2003 01.1.2003–31.3.2003 3,000 03.07.2003 01.4.2003–30.6.2003 4,000 04.10.2003
4.4 Tarla, the owner of a delicatessen shop, began trading on 28 February 2004.She provides you, her accountant, with the following information in respect of her business for the period ended 31
4.5 Luca & Lollo Srl, a wholesale distributor of home appliances, began business on July 2005. The following summarised transactions occurred during July:1. On 1 July, two friends, Luca and Lorenzo,

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