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financial accounting theory

Questions and Answers of Financial Accounting Theory

Distinguish between share capital and loan capital.
Explain ‘gearing’. Why is it significant for ordinary shareholders?
What is meant by issuing shares at a premium? How is this recorded in the accounts?
Explain the importance of a ‘true and fair view’.
Distinguish between the roles of:(a) the Financial Reporting Council;(b) the Accounting Standards Board;(c) the Financial Reporting Review Panel;(d) the Urgent Issues Task Force.
How is financial reporting practice in the UK affected by international influences?
Explain the role of a conceptual framework. Distinguish between financial position, per- formance and financial adaptability.
What are qualitative characteristics?
Explain ‘relevance’ and ‘reliability’. What makes information relevant and reliable?
The partnership of Black, White and Grey are considering forming a limited company to obtain the benefits of limited liability. However, they are uncertain as to whether the capital of the company
Scheid and Sons Ltd are considering expanding their operations. Several alternative strategies are being discussed for financing this expansion. The latest balance sheet of the company as at 31
The Huby Haulage Company Ltd produced the following trial balance at the end of December 20X0. Using this and the additional information following prepare a profit and loss account, appropriation
Nether Edge plc, a retailing company, has an authorized share capital of 700,000 ordinary shares of £1 each. The following trial balance was extracted from the books of account as at 31 December
The following data has been extracted from the records of Purple plc at 31 March 20X1:You are also .given the following information:(a) Number of ordinary shares in issue during the year:
The following information relates to South Ltd for the year ended 31 December 20X0:Required:Prepare a cash flow statement for the year ended 31 December 20X0. Cash and cash equivalents at 1 January
Set out below are the condensed balance sheets for Walkley Ltd for 20X0 and 20X1, and a profit and loss account for the year ended 31 December 20X1.1 The only new loan raised during the year was a
In what ways have the definitions of accounting changed over time?
Discuss the concepts of stewardship, financial and management accounting.
Consider the reasons why accounting has attracted criticism in recent years.
Describe how accountants have responded to those criticisms.
State the groups of persons having vested interests in a business Organization and examine the nature of their information needs.
Evaluate the role of accounting information in the allocation of resources.
Examine the nature of theories.
Analyse the relationship between accounting theory, accounting policy and accounting practice. To what extent does the quality of accounting policy and accounting practice depend on accounting theory?
Distinguish ‘elements’, ‘concepts’ and ‘accounting procedures’.
Contrast the descriptive and normative approaches to theory construction.
Explain how the welfare approach to accounting theory differs from other approaches.
What is the purpose of a profit and loss account?
What is the relationship between the profit and loss account and the balance sheet?
Briefly define (a) fixed assets; (b) current assets; (c) current liabilities; (d) working capital.
In respect of fixed assets as reported on the balance sheet explain (a) cost; (b) accumulated depreciation; (c) net book value.
Explain the difference between a profit and loss account and a cash flow statement.
What are the main sections of a cash flow statement?
Examine the role of so-called concepts in the analysis of accounting transactions and the preparation of financial statements.
Consultat Inc is a firm of consulting engineers, newly established to advise on a large project taking three years to complete. Their fee for this work is a percentage of the total project costs,
Bloxwich Engineers Ltd borrows £100,000 at a fixed interest rate of 10 per cent for a period of five years for the purpose of acquiring a stamping press of advanced design. Suggest how you would
Lewis, Jones and Peers, newly qualified as architects, decide to form a partnership on 1 January 20X0. During their first year of business, a substantial operating loss is realized, amounting to
Discuss the purpose underlying the issue of UK accounting standards.
Identify the four ‘fundamental accounting concepts’ mentioned in SSAP 2 and compare them with the corresponding concepts.
Explain the meaning of an ‘accounting base’. State why accounting bases are more diverse than fundamental concepts.
What do you understand by a ‘source document’? Give three examples of source documents, and explain their importance to the accounting process.
Name the books of original entry to be used for recording the following transactions, and state the accounts to be debited and credited: Transaction (a) Purchase of equipment on credit. Transaction
Prepare journal entries for the following transactions and indicate the journal in which they would normally appear. 1 April 2 April 4 April 5 April 6 April 7 April 8 April 9 April Received invoice
Show the following entries as they would appear in a three-column cash book: 1 May 2 May 3 May 4 May 5 May 6 May Credit balance (on bank statement) at bank 700, cash in hand 5. Cash drawn from bank
Show the effects of the following transactions on the accounting equation. For this purpose, enter these transactions in columns as under: Col 1 Capital Col 2 Liabilities " Col 3 Assets Transaction
Show the accounting effects of the following transactions by reference to the balance sheet and the profit and loss account. Example: cash sale £200 would add £200 to revenue on the profit and loss
Bill Cashing sets up practice as an architect, investing £10,000 of his own money into the business and effecting a transfer of that sum from his personal account to his business account at Barclays
As at 31 December 20X0, the accountant of AB Ltd extracted a trial balance from the firm’s accounting records and, there being a difference, inserted a balancing figure in a suspense account.Later,
(a) Harold Davies is the proprietor of a small building firm. He does not understand the term ‘balance sheet’ and asks you to explain to him whether the following items should be on his balance
Oliver commenced business on 1 June 20X0. The following transactions took place during the month of June.Required:Enter these transactions in Oliver’s accounting records and take out a trial
Richard started up a business as a butcher on 1 March 20X0. His transactions during March were:Required:Enter the transactions in Richard’s accounting records and take out a trial balance at 31
State the concepts which apply to the manner in which periodic revenues and expenses are identified and related. Illustrate your answer.
If goods which cost £10,000 were in stock on 1 January, goods purchased during the year amounted to £40,000 and goods costing £15,000 were in stock at 31 December, state the cost of the goods
From the following information construct the combined Rent and Rates Account for the year ended 30 June 20X1 showing the figures that would appear for rent and rates in the profit and loss account
Star Enterprises Ltd is a company formed to manage the affairs of a successful pop group. All the group’s revenue and expenses are recorded in the company’s books. The group’s recording
Norman is preparing a profit and loss account for the year ended 31 December 20X0. The following payments and income appear as balances on their individual ledger accounts:Required:Prepare ledger
Alistair rents three shops and maintains one account for rent and rates for all three premises.The rents are fixed for each year and increases take effect as from 1 January.At 1 January 20X0, he had
One of the main criticisms of SFAS No. 96 was that most deferred tax assets could not be recognized. SFAS No. 109 liberalized the recognition of deferred tax assets. Deferred tax assets are now
To meet the need for its expanding operations, Johnson Corporation obtained a charter for a separate corporation whose purpose was to buy a land site, build and equip a new building, and lease the
Michaels Corporation has a defined benefit pension plan. In 1987, Michaels adopted the provisions of SFAS No. 87. At January 1, 1987, the projected benefit obligation (PBO) was \(\$ 400,000\).
The most recently published statement of consolidated earnings of National Industries, Inc., appears as follows:Charles Norton, a representative of a firm of security analysts, visited the central
The controller of Navar Corporation wants to issue to stockholders quarterly income statements that will be predictive of expected annual results. He proposes allocating all fixed costs for the year
The weak form of the efficient market hypothesis (EMH), discussed in Chapter 4, implies that a random walk model best describes the behavior of common stock prices. Accordingly, the most recent stock
The Rivera Company, a small retail store, has been in business for a few years. The company's current policy is that all sales are made for cash, and all cash sales are deposited in the company's
Xavier Co. purchased \(\$ 1,000,000\) face amount of Yodel Corp. 16 percent bonds on December 31, 2005, for \(\$ 881,000\). Two years later Zandale Co. purchased \(\$ 1,000,000\) face amount of Yodel
Under SFAS No. 115, investors are required to report investments in debt securities that are not to be held-to-maturity at fair value rather than at amortized cost. Debtors are not covered by the
Rule 203 of the AICPA Code of Professional Ethics requires compliance with accounting principles, and Statement of Auditing Standards No. 69 classified the order of priority an auditor should follow
The FASB has issued SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Scope section of the pronouncement states that its provisions do not apply to enterprises
Marcy Corporation purchased a machine, a depreciable asset, for \(\$ 100,000\).Accounting for depreciable assets involves estimating useful life and salvage value and selecting a depreciation
Traditional accounting practice relies on the historical cost principle. For example, fixed assets (property, plant, and equipment) are reported at book value in the balance sheet, that is, at the
One goal of behavioral accounting research is to assess the effect of accounting numbers and presentations on decision making.Required:Design a case with alternative presentations of the same
The capital asset pricing model illustrates how risk is incorporated into user decision models.Required:Discuss the capital asset pricing model, including systematic and unsystematic risk, beta, the
Refer to Figure 3.4. Suppose Toni's utility function is:Calculate Toni's utility at point Z on Figure 3.4 and compare it with her utility at point M. Which act does Toni prefer? Explain.
What is the beta of:a. The market portfoliob. The risk-free assetc. Portfoho A + B in Example 3.3 and Section 3.7 EXAMPLE 3.3 THE PRINCIPLE OF PORTFOLIO DIVERSIFICATION (PART 2) It turns out that
Explain why most of the benefits of diversification can be attained with only a relatively few securities in the portfoho. Assume that an equal amount is invested in each security. Does the riskiness
The FASB states in SFAC 1:Information about enterprise earnings based on accrual accounting generally provides a better indicator of an enterprise's present and continuing ability to generate
Verify the statement made at the end of Section 3.6 that if Toni Difelice can borrow all she wants at 4% she would borrow S9,800, yielding utility of 2.33. 3.6 The Optimal Investment Decision If a
Mr. Smart is an investor with $15,000 to invest. He has narrowed his choice down to two possible investments:• Mutual fund• Common shares in Buyme Corporation Mr. Smart is risk-averse. The amount
John Save plans to invest \($5,000\) in one of the following instruments: B Bonds of J Ltd., yielding 12% Canada Savings Bonds, yielding 8% On the basis of his knowledge of current economic
"A theoretically correct measure of income does not exist in the real world in which accountants must operate."Requireda. What is meant by the phrase "a theoretically correct measure of income"?b.
Consider the common stock of A Ltd. and the common stock of B Ltd. These two common stocks have the same expected return and the same variance of return.You are a risk-averse investor and have a
"It is possible to reduce risk in a portfolio by diversification."Requireda. Do you agree with this statement? If so, why? Discuss.b. Can the risk of a portfolio be reduced to zero by
Marie has 11,000 that she wishes to invest for one year. She has narrowed her choices down to one of the following two actions:a : Buy bonds of Risky Mining Ltd. These pay 14.4% interest, unless
The owner of a building approaches a banker for a loan to improve the property, to be secured by the rental proceeds. After reviewing the application, the banker assesses that, if the loan is
Over its life, a firm "earns what it earns." That is, its total cash flows and reported net incomes will be equal, regardless of the accounting policies used to report net income year-by-year.Refer
A problem that complicates the relationship between current reported earnings and future earning power is when to recognize revenue as earned. Section 1000.47 of CICA Handbook states that revenue is
Calculate the expected net income for P.V Ltd. for years 1 and 2 in Example 2.2. Explain why expected net income is also called "accretion of discount." TABLE 2.2 CHIEFTAIN INTERNATIONAL, INC. HANGES
In Example 2.2, assume that P.V. Ltd. pays no dividends over its life, until a liquidating dividend is paid at the end of year 2 consisting of its cash on hand at that time.Required Verify that the
Explain why, under non-ideal conditions, it is necessary to trade off relevance and reliability. Define these two terms as part of your answer.
Why do you think Chieftain International's management expresses severe reservations about RRA?
The text discussion of RRA is in terms of the relevance and reliability of the asset valuation of oil and gas reserves. RRA can also be evaluated in terms of the criteria for revenue recognition.
Relevant Ltd. operates under ideal conditions of uncertainty. Its operations are highly dependent on the weather. For any given year, the probabilities are 0.3 that the weather will be bad and 0.7
XYZ Ltd. purchased an asset on January 1, 2000 with a useful life of two years at the end of which it has no residual value. The cash flows from the asset are uncertain. If the economy turns out to
An area where discounting could possibly be applied is for income tax liability resulting from timing differences. Consider a firm that purchases an asset costing 1100,000 on January 1 of year 1.It
On January 1, 2000, GAZ Ltd. purchased a producing oil well, with an estimated life of 15 years, and started operating it immediately. The management ofGAZ Ltd. calculated the present value of future
The following RRA. information is taken from the December 31, 2000, annual report of FX Energy, Inc.Requireda. Prepare income statements, similar to Table 2.5, in both the "sales less amortization"
The text states that matching of costs and revenues is a major challenge of historical cost accounting. Another challenge is revenue recognition, that is, when to recog- nize revenue as realized, or
Which of the following is the best explanation of why depreciation is added back to operating profit while calculating the cash flow from operations?(a) Depreciation is a subjective amount in the
Which of the following is a correct statement?(a) An increase in inventory (stock) will cause a positive cash flow.(b) An increase in receivables (debtors) will cause a positive cash flow.(c) An
During an accounting period, a business sells goods on credit for a total selling price of £6,000. At the start of the accounting period, there are trade receivables (debtors) of £900. At the end

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