relation to whether credit institutions prefer accrual or cash basis financial statements, which statement is correct? Credit institutions are indifferent as to whether or not financial statements prepared under the accrual basis include a cash flow statement. Since credit institutions have information about the loans they have made they do not require information about their customers' liabilities in the financial statements. The cash flow statements sometimes included with accrual basis financial statements provide credit institutions with a projection of the following year's cash inflows and cash requirements. Credit institutions need a complete picture of the assets, liabilities, results and cash flows of a business to assist them in making credit decisions. Which statements is a key cash (or risk) driver of a business? The income tax rate on company profits. Sales growth rate. The depreciation rate on assets. The price per unit of sales. Question (11) When conducting a financial review, which of the following items would you need to look for outside of the annual financial statements? Details of accounting policies used and significant assumptions made in preparing the financial statements. A breakdown and comparative analysis of net income. A narrative summary of the trading conditions over the period. Analysis of assets and liabilities A company has the following results: Revenue 300, Cost of Sates 140, Interest Expense 10, Depreciation 80, Tax Charged 15 and Operating Expense of 30. What is the businessines profit? 160 35 co Question (3) Which statement regarding the balance sheet is correct? In the balance sheet, Assets plus Shareholders' Equity equal Liabilities. Balance sheet accounts are cleared to zero each year if there are no transactions during the year. Differences in balance sheet accounts from one period to the next reflect activity in that period. The amount in the balance sheet accounts reflects the total activity in that account during the year. A compary receives imventory on 15 April and pays for it in part by cash, with the balance payable 30 diays later. What is recorded in the accounts on 15 April inder the accriat mothod? The calh amount is recorded os an expense with the balance recorded as a pavable. Cashelements only Both the cast and non-castr component Nothing until the full amount is paid What is the purpose of the conservatism principle in accounting? When asset values are uncertain they should be represented on the balance sheet at their original cost. It ensures that a business cannot distribute reserves that it might require to pay creditors. Where there is uncertainty it is better to be cautious when recognizing gains and asset values. It allows a company to create artificial losses, allowing it to smooth profits from one year to the next. What accounting entries should be used to record the increase of inventory (an asset) with cash? Debit expenses and credit cash. Debit inventory and credit cash. Debit expenses and debit inventory. Credit inventory and debit expenses.. How might a preliminary review of a potential customer's financial statements assist a credit officer in their work? It will help inform the officer about the business and heip in their interaction with the potential customer. It will identify all significant financial risks that the customer faces. It will identify if the assets on the balance sheet are carried above their market values. It will identify if the company has significant cash requirements in the next financial year. A prospective customer presents you with a set of accounts prepared on the accrual basis. When reviewing the accounts, which item should concern you the least? The accounts receivable balance has risen significantly during the vear The accounts show an increasing cash balance in the last 12 months. The accounts payable is greater than the accounts receivable balance. There is no note with the accounts describing the main accounting policies. Fom an initial revew of accrual basis tinancial statements you identify that cost of sales have increased by 25% while revenues have incteased by 15%. W datement correctly identifies a possible cause of this? During the year the business entereda new market, incurring start up costs. During the yeat the business embarked on a cost cutting initiative. There mav be a timing difference between payments for costs ind roctuipts from sales. A major customer had encountered cash flow difficulties deferting payment until the following veas: Question (1) What is one disadvantage of accrual-based accounting? It gives an incomplete picture of the assets owned by a business. It can give an inaccurate impression of the cash position of the business. It overlooks cash flows arising from transactions completed in previous periods. Accounts are less comparable between periods because they overlook cash flows arising from transactions completed in previous periods. You are examining a loan request for a short-term loan to cover working copital requirements, On examining the financial statements you establish that sales have fallen, the business has an operating loss, it has negative operating cash flow and there is a sharp increase in payable days outstanding. You establish that this is high risk loan application. How should you proceed with your financial analysis? You should examine the financial statements more carefully to see if there are any opportunities to turnaround the business. You should eamine the financial statements more carefully to see if there are any assets that might be sold to finance the loan. You need not do further work with the financial statements and can reject the loan application. You should examine the financial statements more carefully to see if there are any off talance shiset fiablitites that may increase the level of risk: Question (15) Which statement provides a correct illustration of the matching principle? Revenue of one period equals costs plus dividends of the same period. Total assets is matched to total liabilities plus equity. The total value of debit entries will equal the total value of credit entries. Expenses of a period are matched to the revenues that they generate. Which statement is true regarding double-entry accounting? The difference between debit and credit entries in the accounts equals profit or loss. There will always be the same number of debit and credit entries. The value of debit and credit entries for each financial transactions will not always be equal. The total value of debit entries must equal the total value of credit entries Vhich statement accurately describes the major accounting blocks in the financial statements? The blocks can all be moved between the income statement and balance sheet. The accounting blocks divide accounts into 5 groups covering both income statement and balance sheet accounts. Four of the accounting blocks relate to the balance sheet only and are always arranged in the same way. Accounts may be placed in any of the blocks in order to make it easier for preparers of accounts to arrange information as they choose