management Accounting

Answer ONE question from SECTION A Question 1 Answer both parts a) and b) a) Much of the current thinking of accounting standard setters about measurement seems to be based on an idealized view of markets as being complete and in perfectly competitive equilibrium. In such conditions, there is a unique market price based on a full set of information for every asset and liability. There is an obvious attraction in using this price as a measure for accounting, which explains standard setters' enthusiasm for single ideal measurement methods based on market price, such as fair value (FV), defined in SFAS 157 and IFRS 13 as a market selling price (Whittington, 2010). Given that in reality ideal conditions of markets are unlikely to hold, critically appraise whether a single measurement basis in financial reporting is appropriate. (25 marks) b) M&S plc operates under ideal conditions of both certainty and uncertainty. At the beginning of its operation, M&S plc acquired an asset to be used in its business. The asset will last three years, at which time its salvage value will be 500. M&S plc financed the asset purchase by issuing ordinary shares. In the first year of operation, net cash flows will be guaranteed at 4,000. However, its cash flows in the second and third years depend on the demand conditions. In the second year, cash flows will be 3,000 if the demand conditions are favourable and 1,200 if they are unfavourable. In the third year, cash flows will be 3,200 if the demand conditions are favourable and 1,000 if they are unfavourable. Cash flows are received at year-end. In the second year, the probability that the demand conditions are favourable is 0.3 and 0.7 that they are unfavourable. In the third year, the probability that the demand conditions are favourable is 0.4 and 0.6 that they are unfavourable. The interest rate in the economy is 8% in all three years. M&S plc pays a dividend of 300 at the end of the first year and 500 in the second year In the second year, the demand condition is favourable. Demand condition for the third year is not yet known. Prepare the statement of financial position (balance sheet) and the statement of income for the first and second years. (25 marks)