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introductory financial accounting for business

Questions and Answers of Introductory Financial Accounting for Business

2 ‘Profit on a contract is not realised until completion of the contract.’ Discuss.
1 Discuss the point in a contract’s life when it becomes appropriate to recognise profit and the feasibility of specifying a common point, e.g. when contract is 25% complete.
The income statement of Bottom, a manufacturing company, for the year ending 31 January 20X2 is as follows:Note – accounting policies Bottom has used the LIFO method of inventory valuation but the
Beta Ltd commenced business on 1 January and is making up its first year’s accounts. The company uses standard costs. The company own a variety of raw materials and components for use in its
Alpha Ltd makes one standard article.You have been given the following information:1 The inventory sheets at the year-end show the following items:Raw materials:100 tons of steel:Cost £140 per ton
Purchases of a certain product during July were:Units sold during the month were:Required:Assuming no opening inventories:(a) Determine the cost of goods sold for July under three different valuation
Sunhats Ltd manufactures patent hats. It carries inventory of these and sells to wholesalers and retailers via a number of salespeople. The following expenses are charged in the profit and loss
8 The following is an extract from the Sudzucker AG 2003 Annual Report:Inventories are stated at acquisition or production cost using average cost or first-in, first-out.As set out in IAS 2 the
7 The following is an extract from the Interbrew 2003 Annual Report:Inventories are valued at the lower of cost and net realisable value. Cost is determined by the weighted average method. The cost
6 Discuss why the accurate valuation of inventory is so crucial if the financial statements are to show a true and fair view.
5 Discuss the effect on work-in-progress and finished goods valuation if the net realisable value of the raw material is lower than cost at the balance sheet date.
4 Explain the criteria to be applied when selecting the method to be used for allocating costs.
3 Discuss the application of individual judgement in inventory valuation, e.g. changing the basis of overhead absorption.
2 Discuss the acceptability of the following methods of inventory valuation: LIFO; replacement cost.
1 Discuss why some form of theoretical pricing model is required for inventory valuation purposes.
The brands debate Under IAS 22, the depletion of equity reserves caused by the accounting treatment for purchased goodwill resulted in some companies capitalising brands on their balance sheets. This
Additional information relating to the above balance sheet(i) The intangible assets of Yukon Ltd were brand names currently utilised by the company.The directors felt that they were worth £7 million
International Accounting Standards IFRS 3 and IAS 38 address the accounting for goodwill and intangible assets.Required:(a) Describe the requirements of IFRS 3 regarding the initial recognition and
Oxlag plc, a manufacturer of pharmaceutical products, has the following research and development projects on hand at 31 January 20X2:(A) A general survey into the long-term effects of its sleeping
As chief accountant at Italin NV, you have been given the following information by the director of research:The board of directors considers that this project is similar to the other projects that
Environmental Engineering plc is engaged in the development of an environmentally friendly personal transport vehicle.This will run on an electric motor powered by solar cells, supplemented by
10 IFRS 3 has introduced a new concept into accounting for purchased goodwill – annual impairment testing, rather than amortisation. Consider the effect of a change from amortisation of goodwill(in
9 Critically evaluate the basis of the following assertion: ‘I am sceptical that it [the impairment test]will work reliably in practice, given the complexity and subjectivity that lie within the
8 How is ‘value in use’ calculated for an impairment review? What are the areas of subjectivity?
7 The Chloride 2003 Annual Report included the following accounting policy for goodwill:Goodwill is subject to review at the end of the year of acquisition and at any other time when the directors
6 Discuss the advantages and disadvantages of the proposal that there should be a separate category of asset in the balance sheet clearly identified as ‘research investment – outcome uncertain’.
5 The Nestlé 2000 Annual Report included goodwill of CHF3,395 million arising on the acquisition of various companies such as PowerBar Inc., the US leader in the emerging energy bar category, and
4 Here is an extract from the Reckitt Benckiser 2000 Annual Report:Acquired brands are only recognised on the balance sheet as intangible assets where title is clear, brand earnings are separately
3 Discuss the suggestion that the requirement for companies to write off research investment rather than showing it as an asset exposes companies to short-term pressure from acquisitive companies
2 Describe the problems encountered when accounting for:(a) tangible fixed assets;(b) leasing (in lessees’ accounts);(c) research and development;and outline the recommended accounting treatment
1 In connection with IAS 38 Intangible Assets:(a) Define ‘applied research’ and ‘development’.(b) Why is it considered necessary to distinguish between applied research and development
At 1 January 20X5 Bridge finance plc agreed to finance the lease of machinery costing $37,200 to Rapid Growth plc at a lease cost of $10,000 per annum payable at the end of the year, namely 31
The Mission Company Ltd, whose year-end is 31 December, has acquired two items of machinery on leases, the conditions of which are as follows:Item Y: Ten annual instalments of £20,000 each, the
(a) When accounting for finance leases, accountants prefer to overlook legal form in favour of commercial substance.Required:Discuss the above statement in the light of the requirements of IAS 17
On 1 January 20X8, Grabbit plc entered into an agreement to lease a widgeting machine for general use in the business. The agreement, which may not be terminated by either party to it, runs for six
7 Peter Mullen says the following, in an article sent to the ASB:the ASB advocates that all leasing type deals should essentially be accounted for in relation to the extent of asset and liability
6 The Body Shop International plc 2004 Annual Report included the following accounting policy:Leased assets Assets held under finance leases are capitalised at amounts approximating to the present
5 The BOC Group 2004 Accounting Policies state:Where finance leases have been entered into, the capital elements of the obligations to the lessor are shown as part of borrowings and the rights in the
4 The favourite off balance sheet financing trick used to be leasing. Use any illustrative numerical examples you may wish to:(a) Define the term ‘off balance sheet financing’ and state why it is
3 Explain the major provisions of IAS 17 Leases.
2 (a) Consider the importance of the categorisation of lease transactions into operating lease or finance lease decisions when carrying out financial ratio analysis.What ratios might be affected?(b)
1 Can the legal position on leases be ignored now that substance over form is used for financial reporting? Discuss.
(a) IAS 16 Property, Plant and Equipment requires that where there has been a permanent diminution in the value of property, plant and equipment, the carrying amount should be written down to the
Simple SA has just purchased a roasting/salting machine to produce roasted walnuts. The finance director asks for your advice on how the company should calculate the depreciation on this machine.
The finance director of the Small Machine Parts Ltd company is considering the acquisition of a lease of a small workshop in a warehouse complex that is being redeveloped by City Redevelopers Ltd at
In the year to 31 December 20X9, Amy bought a new machine and made the following payments in relation to it:Required:(a) State and justify the cost figure which should be used as the basis for
Mercury You have been given the task, by one of the partners of the firm of accountants for which you work, of assisting in the preparation of a trend statement for a client.Mercury has been in
(a) Discuss why IAS 40 Investment Property was produced.(b) Universal Entrepreneurs plc has the following items on its PPE list:(i) £1,000,000 – the right to extract sandstone from a particular
8 ‘Depreciation should mean that a company has sufficient resources to replace assets at the end of their economic lives.’ Discuss.
7 Define an investment property and explain its treatment in financial statements.
6 How should grants received towards expenditure on PPE be treated?
5 What effect does revaluing assets have on gearing (or leverage)?
4 Define ‘cost’ in connection with PPE.
3 What is meant by the phrases ‘useful life’ and ‘residual value’?
2 Define depreciation. Explain what assets need not be depreciated and list the main methods of calculating depreciation.
1 Define PPE and explain how materiality affects the concept of PPE.
The move from the preparation of accounts under UK GAAP to the use of IFRS by United Kingdom quoted companies for years beginning after 1 January 2005 will have an effect on the level of profits
In your capacity as chief assistant to the financial controller, your managing director has asked you to explain to him the differences between tax planning, tax avoidance and tax evasion.He has also
A fixed asset (a machine) was purchased by Adjourn plc on 1 July 20X1 at a cost of £25,000.The company prepares its annual accounts to 31 March in each year. The policy of the company is to
8 Explain the effect of SSAP 5 Accounting for Value Added Tax.
7 Explain the criteria that a deferred tax provision needs to satisfy under IAS 12 in order to be accepted as a liability in the balance sheet.
6 Distinguish between (a) the deferral and (b) the liability methods of company deferred tax.
5 Explain how dividends received and paid are shown in the accounts.
4 Deferred tax accounting may be seen as an income-smoothing device which distorts the true and fair view. Explain the impact of deferred tax on reported income and justify its continued use.
3 Explain how the corporation tax system changed as from April 1999.
2 Explain clearly how advance corporation tax arose and its effect on the profit and loss account and the year-end balance sheet figures. (Use a simple example to illustrate.)
1 Why does the charge to taxation in a company’s accounts not equal the profit multiplied by the current rate of corporation tax?
Donna Inc operates a defined benefit pension scheme for staff. The pension scheme has been operating for a number of years but not following IAS 19. The finance director is unsure which accounting
Kathryn plc, a listed company, provides a defined benefit pension for its staff, the details of which are given below.Pension scheme As at 30 April 2004, actuaries valued the company’s pension
8 The following are extracts from the financial statements of Heidelberger Druckmaschinen AG showing the accounting policy and detailed notes regarding the provision of pensions according to IAS 19.
7 What distinguishes a termination benefit from the other benefits considered in IAS 19 (revised)?
6 What is the required accounting treatment for a curtailment of a defined benefit pension scheme?
5 Past service costs are recognised under IAS 19 (revised) immediately if the benefit is ‘vested’. In what circumstances would the benefits not be vested?
4 Under the revised IAS 19 (post-1998) what amount of actuarial gains and losses should be recognised in the income statement?
3 ‘The approach taken in IAS 19 before its 1998 revision was to match an even pension cost against the period the employees provided service. This follows the accruals principle and is therefore
2 If a defined contribution pension scheme provided a pension that was 6% of salary each year, the company had a payroll cost of 5 million, and the company paid 200,000 in the year, what would be
1 Outline the differences between a defined benefit and a defined contribution pension scheme.
In October 20X1, Little Raven plc issued 50,000 debentures, with a par value of £100 each, to investors at £80 each.The debentures are redeemable at par on 30 September 20X6 and have a coupon rate
On 1 October year 1, RPS plc issued one million £1 5% redeemable preference shares. The shares were issued at a discount of £50,000 and are due to be redeemed on 30 September year 5. Dividends are
On 1 April year 1, a deep discount bond was issued by DDB AG. It had a face value of £2.5 million covering a five-year term.The lenders were granted a discount of 5%. The coupon rate was 10% on the
7 Interest rate swaps can be designated as hedges. A swap of floating for fixed rate is a cash flow hedge, but a swap of fixed for floating is a fair value hedge. Why?
6 Many groups have treasury policies that use hedging of net positions. They would look at their group-wide exposure in, e.g., foreign currency and then take forward contracts to cover the position.
5 Following from Question 4, if the debt instrument was included in the balance sheet at fair value through profit or loss this would mean that a profit would be recognised in the income
4 A reduction in the credit rating of a business would reduce the fair value of its debt instruments.Explain why this is the case.
3 ‘Disclosure of the fair values of financial instruments (as required by FRS 13 in the UK) is better than measuring them at fair values in the financial statements (as is often required by IAS 39)
2 Explain why financial instruments, particularly derivatives, can alter the risk profile of a business. Use a forward currency contract as an example. Discuss whether disclosure alone is sufficient
1 Discuss the implications for businesses of a substance approach being used for the presentation of liabilities and equity. Indicate how the terms of an instrument could present problems in
The directors of Apple Pie plc at the September 20X5 board meeting were expressing concern about falling sales and the lack of cash to meet a dividend for the current year ending 31 December at the
(a) Provisions are particular kinds of liabilities. It therefore follows that provisions should be recognised when the definition of a liability has been met. The key requirement of a liability is a
As the financial controller of SEAS Ltd, you are responsible for preparing the company’s financial statements and are at present finalising these for the year ended 31 March 20X8 for presentation
(a) Post balance sheet events are those events, both favourable and unfavourable, which occur between the balance sheet date and the date on which the financial statements are approved by the board
8 Mining, nuclear and oil companies have normally provided an amount each year over the life of an enterprise to provide for decommissioning costs. Explain why the IASB considered this to be an
7 D Ltd has a balance on its debtors’ account of £100,000. Previous experience would anticipate bad debts to a maximum of 3%.The company adopts a policy of factoring its debts. Explain how the
6 Discuss the problems of interpreting financial reports when there are events after the balance sheet date, and the extent to which you consider IAS 10 should be amended. Illustrate your decisions
5 A boat manufacturer, Swann SpA, supplies its dealers on a consignment basis, which allows either Swann SpA or a dealer to require a boat to be returned. Each dealer has to arrange insurance for the
4 As a sales incentive, a computer manufacturer, Burgot SA, offers to buy back its computers after three years at 25% of the original selling price, so providing the customer with a guaranteed
3 In 20X6 Alpha AS made the decision to close a loss-making department in 20X7.The company proposed to make a provision for the future costs of termination in the 20X6 income statement.Its argument
2 A company is obliged to reveal, in note form, a quantitative assessment of the dilution of future earnings per share on the assumption that convertible stock in issue will experience total
1 Some members of the board of directors of a company deliberating over a possible source of new capital believe that irredeemable debentures carrying a fixed annual coupon rate would suffice.They
A summary of the balance sheet of Doxin plc, as at 31 December 20X0, is given below:During 20X1, the company:(i) Issued 200,000 ordinary shares of £1 each at a premium of 10p per share (a specific

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