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financial accounting for decision makers
Questions and Answers of
Financial Accounting For Decision Makers
4.6 Refer to Table 4.3 adidas-Salomon income statement for 2004.(a) Determine gross profit and net profit percentages.(b) Determine EBITDA, EBIT and EBT.(c) Compare gross profit and net profit
• define the basic principles of revenue recognition
• define deferred or unearned revenues
• account for cash and credit sales
• estimate and interpret uncollectible receivables
• determine construction contract revenue and expenses
• determine trade receivables turnover and days sales outstanding.
5.1 (a) Why is the realisable value of a sale on credit sometimes lower than that of a cash sale?(b) What is the difference between a cash discount and a trade discount?
5.2 A bookshop ordered 1,000 copies of an introductory accounting textbook from a publisher on 7 January 2004. The books were delivered on 2 February at which time an invoice was sent requesting
5.3 Tuck Ltd made gross sales of EUR 100,000 during February 2005. Sales returns and allowances were EUR 8,000. Cash discounts granted were EUR 4,000.(a) Analyse the impact of these transactions on
5.4 In 2004, Diletta & Co had the following:• net sales: EUR 500,000• cash discounts on sales: EUR 40,000• sales returns and allowances: EUR 50,000.(a) Prepare the revenue section of the 2004
5.5 In January 2002 Emanuele & Lollo Co undertakes a four-year project at a contracted price of EUR 100 million that will be billed in four equal annual instalments of EUR 25 million each year over
5.6 Consider the following:Income statement (extract) 2004 2003 2002 EUR EUR EUR Sales 20,000 25,000 24,000 Balance sheet (extract) 31 Dec. 2004 31 Dec. 2003 31 Dec. 2002 EUR EUR EUR Trade and other
6.1 IAS 2 – Inventories prescribes the accounting treatment for inventories under the historical cost system. Briefly explain how IAS 2 requires the following to be dealt with:(a) The determination
6.2 (a) If sales are EUR 24,000 and cost of sales is EUR 18,000, then what is the gross profit margin?(b) Sales are EUR 30,000 and gross profit margin is 20 per cent. What is cost of sales?(c) BiBi
6.3 Naomi Ltd starts a business selling fake fur coats. The following purchases of fake fur are made during the first year:Date Quantity Cost per metre Total cost metres EUR EUR 10 January 2005 2,000
6.4 At 30 September 2005 Ballata had the following inventories:Cost Selling Estimated price cost of realisation EUR EUR EUR 120 ‘Ping’ irons No. 3 5,880 7,215 35 475 Doz golf balls 8,225 9,100
6.5 A retailer has the following purchases and sales of a particular product line:Units Purchase Units sold Selling price purchased price per unit per unit EUR EUR 2 December 100 500 60 530 16
6.6 Selim Plc began 2004 with inventory of EUR 320,000. Sales in 2004 were EUR 1,600,000, purchases of inventory totalled EUR 1,380,000, and ending inventory was EUR 440,000.(a) Prepare a statement
1. Evidently, there are two ways of handling purchase discounts. They can be either deducted from the cost of the purchased goods, or reported as other income. But is the effect on net profit not the
2. It is said that the LIFO method assumes that the goods purchased last are sold first. If this is so, the assumption is clearly unrealistic because companies ordinarily sell their oldest
3. Are the following generalisations valid?(a) The difference between LIFO and FIFO is relatively small if inventory turnover is relatively high.(b) The AVCO method will result in net profit that is
4. A distillery manufactured bourbon whiskey, which it aged in charred, white oak barrels for four years before bottling and selling it. Whiskey was carried in inventory at approximately EUR 3 per
• distinguish between tangible and intangible assets, and explain how the costs of each are recognised
• compute depreciation for property, plant and equipment using various depreciation methods
• compute gains and losses on disposal of PPE
• distinguish between finance and operating lease
• describe accounting practice for various intangible assets
• account for impairment losses
• calculate ratios relating to tangible and intangible (non-current)assets.
7.1 (a) Define PPE and ‘cost’ in connection with PPE.(b) Define depreciation. Explain what assets need not be depreciated and list the main methods of calculating depreciation.(c) What is meant
7.2 On 1 January 2005, Zetajane Inc acquired production equipment for EUR 250,000. The following further costs were incurred:Delivery EUR 18,000 Installation EUR 24,000 General administration costs
7.3 At the beginning of 2002, Gadue Computer purchased a machine, used in the production of computers, for EUR 359,000. In addition to the price of the machine, Gadue paid insurance during shipment
7.4 Laurensmani SpA’s financial year is to 31 December. It uses the straight-line method of depreciation for machinery.On 1 January 2004 the enterprise purchased a machine for EUR 10,000. The
7.5 On 1 January 2005 a manufacturing machine of EUR 330,000 is acquired by way of a finance lease agreement under the following terms:• Lease term: three years• Instalments of EUR 72,500 are
7.6 Expenditure on research costs should be recognized as an expense when it is incurred ( . . . ) An intangible asset arising from development should be recognized if, and only if, an enterprise can
7.7 Autocar Inc, a motor vehicle manufacturer, has a research division that worked on the following projects during 2004:Project 1 – The design of a steering mechanism that does not operate like a
• Direct labour – 620 320
• Department head salary 400 – –
• Administrative personnel 725 – –Overhead
• Direct – 340 410
• Indirect 270 110 60 The departmental head spent 15 per cent of his time on Project 1 and 10 per cent of his time on Project 2.Determine the costs to be capitalised.
1. Ignoring the effect of income taxes, prepare an income statement for 2004 and a balance sheet as at 1 January 2004 and 31 December 2004 assuming that:(i) ABC expenses EUR 1,000 in construction
2. Show the effects of decisions (i) and (ii) on shareholders’ equity, profit before tax, pretax operating and investing cash flows, and on key financial ratios.
3. Summarise the results of decision (i) and decision (ii).
• account for bonds and other borrowings
• understand the difference between liabilities, provisions and contingent liabilities
• explain why differences between accounting profit before taxes and taxable profit may give rise to deferred taxes
• determine deferred tax liabilities or assets
• use ratio analysis to assess an enterprise’s debt level.
8.1 (a) Distinguish between current liabilities and non-current liabilities. Name and briefly describe three items belonging to each category.(b) Why do the income taxes charged to an income
8.2 Suppose that on 1 October 2004 Viaggimmagine SpA, an Italian tour operator, issued bonds for EUR 1 million, at an interest rate of 5 per cent per annum, with semiannual interest payments, to be
8.3 (a) The Mighty Mouse Trap Company has just started to export mouse traps to the US. The advertising slogan for the mouse traps is, ‘A girl’s best friend.’ The Utopian Liberation Movement is
8.4 The following information relates to Terril Co as at 31 December 2004:Carrying value Tax base EUR EUR Non-current assets Property, plant and equipment 200,000 175,000 Receivables Trade
8.5 Trevelyan was incorporated on 1 January 2004. On 10 January, equipment for EUR 48,000 and motor vehicles for EUR 12,000 were acquired. In the year ended 31 December 2004 the enterprise made a
8.6 Refer to Table 3.8 (on page 59) – Consolidated balance sheet of Puma as at 31 December 2004.(a) Determine debt-to-equity ratio and debt ratio.(b) Compare them with adidas-Salomon’s (see
• describe the components of owners’ equity in the different legal forms of enterprises
• account for issues of ordinary and preference shares
• analyse a statement of changes in shareholders’ equity
• determine basic and diluted earnings per share (EPS)
• define and determine the return on equity (ROE).
9.1 (a) Ordinary shareholders have limited liabilities. Explain.(b) ‘Treasury shares are unissued shares.’ Do you agree?(c) In what way are preference shares similar to debt and to ordinary
9.2 (a) ‘When companies repurchase their own shares, the accounting depends on the purpose for which the shares are repurchased.’ Explain.(b) ‘When a company retires shares, it must pay the
9.3 Two recent business school graduates, Alexander and Andrea, started a shop called Infinitum Exports on 1 January 2004. Their partnership agreement stipulated that each would receive 10 per cent
9.4 On 31 December 2004, the shareholders’ equity section of the balance sheet of XYZ was as follows:Capital issued – ordinary shares 1,000,000 at EUR 5 par EUR 5,000,000 Share premium reserve
9.5 Refer to Table 3.8 – Consolidated balance sheet of Puma as at 31 December 2004 and Table 4.4 – Puma management income statement for 2004.(a) Determine Puma’s ROE for 2003 and 2004.(b)
9.6 The equity of Net Facile, an Italian internet provider, as at 30 September 2005 and 2004 is as follows (amounts in millions of euro):2005 2004 Shareholders’ equity Issued capital 1,000 800
• understand the basic principles of double-entry bookkeeping
• apply the principles of double-entry bookkeeping to transactions and balance the accounts
• prepare an income statement and a balance sheet from the underlying accounts.
10.1 For each of the following accounts, indicate whether it normally has a debit or a credit balance. Use dr. or cr:1. Sales revenue 7. Retained earnings 2. Trade and other payables 8. Depreciation
10.2 Prepare journal entries and post to T accounts the following transactions of Edoardo Catering Company:(a) Cash sales, EUR 10,000.(b) Collection of trade receivables, EUR 6,000.(c) Paid cash for
10.3 Reconstruct the journal entries (omit explanations) that would have resulted for the postings to the following T accounts of a consulting enterprise: Cash and cash equivalents a 120,000 2,000 b
10.4 Consider the following trial balance (amounts in euro):Beppe & Brothers Auto Parts Store – trial balance as at 31 March 2005 Debit Credit Cash and cash equivalents 32,000 Trade and other
10.5 Sabrina Migliaccio owned and managed a franchise of Caffè Espresso srl.The trial balance on 1 January 2005, the beginning of its accounting period, is listed as follows:Caffè Espresso srl –
10.6 La Campania SpA produced various types of pasta. The company had the following trial balance for the year ended 30 June 2005 (amounts in millions of euro):Debit Credit Current assets 4,173 PPE,
What are the three forms of business organization? Briefly describe each form.
How do an income statement and a statement of cash flows differ? How are they similar?
How would you evaluate the following statement: "The auditors are in the best position to evaluate a com- pany because they have prepared the financial statements"?
Why is the economic entity assumption important in preparing a set of financial statements?
What is meant by the phrase generally accepted ac- counting principles?
Greenway Corporation is organized on June 1, 1998. The company will provide lawn care and tree-trimming services on a contract basis. Following is an alphabetical list of the items that should appear
Annual Report Information Critics of financial reporting have said that accounting information, specifically an an- nual report, is not useful for decision making because it is published three or
Forms of Organization A university is an entity that requires an accounting system. Is a university a business or nonbusiness entity? What type of accounting system do universities use? Within large
Users of Accounting Information and Their Needs Listed below are a number of the important users of accounting information. Below the list are descriptions of a major need of each of these various
Changes In Owners' Equity The following amounts are available from the records of Coaches and Carriages Inc. at the end of the years indicated:Required 1. Compute the changes in Coaches and
Classification of Financial Statement Items Classify each of the following items according to (1) whether it belongs on the income statement (IS) or balance sheet (BS) and (2) whether it is a revenue
Net Income (or Loss) and Retained Earnings The following information is available from the records of Prestige Landscape Design Inc. at the end of the 1998 calendar year:Required Use the information
Statement of Retained Earnings Ace Corporation has been in business for many years. Retained earnings on January 1, 1998, is $235,800. The following information is available for the first two months
Accounting Principles and Assumptions The following basic accounting principles and assumptions were discussed in the chapter:Going concern Economic entity Monetary unit Cost principle Time period
Organizations and Accounting Match each of the organizations listed below with the statement that most adequately describes the role of the group.Securities and Exchange Commission International
Cash Flows The operating activities of Springview Corporation generated $50,000 of cash during the year. Net income for the year was $75,000, and cash dividends of $45,000 were paid. Springview spent
Roles of Accountants One day on campus, you overhear two nonbusiness majors discussing the reasons each did not major in accounting. "Accountants are bean counters. They just sit in a room and play
You Won the Lottery You have won a lottery! You will receive $200,000, after taxes, each year for the next five years.Required Describe the process you will go through in determining how to invest
Effect of Forms of Organization an Accounting for the Entity Entities can be organized as sole proprietorships, partnerships, or corporations. The following is a list of entities:1. A snow cone
Cash Flows for McDonald's Corporation McDonald's Corporation had cash and equivalents of $334.8 million on December 31, 1995. McDonald's reported revenues of $9,794.5 million, total operating costs
Users of Accounting Information and Their Needs Microsenses Company would like to buy a building and equipment to produce a new product line. Some information about Microsenses is more useful to some
Balance Sheet The following items are available from records of Freescia Corporation at the end of the 1998 calendar year:Required Prepare a balance sheet. Hint: Not all of the items listed should
Corrected Balance Sheet Dave is the president of Avon Consulting Inc. Avon began business on January 1, 1998. The company's controller is out of the country on business. Dave needs a copy of the
Income Statement, Statement of Retained Earnings, and Balance Sheet Shown below, in alphabetical order, is a list of the various items that regularly appear on the financial statements of Maple Park
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