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accounting and finance for non specialists
Questions and Answers of
Accounting And Finance For Non Specialists
What potential problems arise when interpreting financial ratios based on statement of financial position figures? Why is this a particular problem for external users?
Amsterdam Ltd and Berlin Ltd are both wholesalers serving broadly the same market, but they seem to take a different approach to it according to the following information:Required:Describe what this
Can you think of any benchmarks, or bases, that could be used to compare a ratio that you have calculated from the financial statements of your business for a particular period?
Threads Limited manufactures nuts and bolts, which are sold to industrial users. The abbreviated financial statements for each of the last two years are as follows:Required:(a) Calculate the
What do you deduce from a comparison of the declines in the operating profit and gross profit margin ratios?
What do you deduce from a comparison of the efficiency ratios over the two years?
What do you deduce from these liquidity ratios?
What do you deduce from the investment ratios set out above? Can you offer an explanation why the share price has not fallen as much as it might have done, bearing in mind the much poorer trading
Assume that a business has internally generated goodwill that had been created in earlier years. If this resource were introduced as a non-current asset (with an indefinite life) in the current
How will this affect the profitability ratios mentioned in the chapter?
Cottage Industries Ltd makes baskets. The fixed cost of operating the workshop for a month totals £500. Each basket requires materials that cost £2. The business pays the basket makers £10 for
Khan Ltd can render three different types of service (Alpha, Beta and Gamma) using the same staff. Various estimates for next year have been made as follows:Required:(a) If the business were to
Lombard Ltd has been offered a contract for which there is available production capacity. The contract is for 20,000 identical items, manufactured by an intricate assembly operation, to be produced
Historic cost can never provide a value that is relevant to a decision. Despite this, historic costs are the principal inputs for preparing financial accounting statements (income statements and
You own a motorcar, for which you paid a purchase price of £5,000 – much below the list price – at a recent car auction. You have just been offered £6,000 for this car.What is the cost to you
Assume that the car cost £10,000. Would this alter the relevance of the historic cost?
Assume that the decision did not concern a choice between two models of lorry but rather whether or not to operate an additional lorry. Would this make a difference to the view taken concerning the
Can you give some examples of items of cost that are likely to be fixed for a hairdressing business? Try to think of at least two.
Does fixed cost stay the same irrespective of the volume of output, even where there is a massive rise in that volume? Think in terms of the rent cost for the hairdressing business.
Can you think of some examples of cost elements that are likely to be variable for a hairdressing business?Try to think of at least one.
Can you suggest another cost for a hairdressing business that is likely to be semi-fixed (semi-variable)?
Can you think of reasons why the managers of a business might find it useful to know the BEP of some activity that they are planning to undertake?
What advice would you give Cottage Industries Ltd about renting the machine, on the basis of the values for margin of safety?
What types of business activity are likely to have high operating gearing? (Hint: Cottage Industries Ltd might give you some idea.)
We saw above that, in practice, relationships between costs, revenues and volumes of activity are not necessarily straight-line ones.Can you think of at least three reasons, with examples, why this
What practical steps could be taken that might lead to a higher level of contribution for the business in Activity 7.19?Data from Activity 7.19A business makes three different products, the details
Going back to Activity 7.19, what is the maximum price that the business concerned would logically be prepared to pay to have the remaining B14s machined by a subcontractor, assuming that no fixed
Fruitjuice Ltd began operations at the beginning of May. It has just one product, a sparkling orange drink that is marketed as ‘Orange Fizz’. During May the business produced 7,300 litres of the
Psilis Ltd makes a product in two qualities, called ‘Basic’ and ‘Super’. The business is able to sell these products at a price that gives a standard profit mark-up of 25 per cent of full
Johnson Ltd provides a personal computer maintenance and repair service. It has overheads of £10,000 each month. Each month 1,000 direct labour hours are worked and charged to cost units (jobs
A business, that provides a service, expects to incur overheads totalling £20,000 next month. The total direct labour time worked is expected to be 1,600 hours and machines are expected to operate
Distinguish between1. Job costing;2. Process costing; and3. Batch costing.Fully explain each approach.
Can you think of industries where process costing may be suitable? Try to think of at least two.
Moleskin Ltd manufactures a range of products used in the building industry. Manufacturing is undertaken using one of two processes: the Alpha Process and the Omega process. All of the products are
Consider this statement:‘In a job costing system, it is necessary to divide up the business into departments. Fixed costs (or overheads) will be collected for each department. Where a particular
A garage owner wishes to know the direct cost of each job (car repair) that is carried out. How might the direct cost (labour and materials) information concerning a particular job be collected?
Comment critically on the following two statements:(a) ‘Activity-based costing is a means of more accurately accounting for direct labour cost.’(b) ‘Activity-based costing cannot really be
Why would this method have little to commend it?
Marine Suppliers Ltd undertakes a range of work, including making sails for small sailing boats on a made-to- measure basis.The business expects the following to arise during the next month: Direct
Can you think of reasons why direct labour hours tend to be regarded as the most logical basis for sharing overheads between cost units? Try to think of at least one.
Can you think of industries or businesses where job costing may be suitable? Try to think of at least two.
The point was made above that it would normally be irrational to prefer one basis of charging overheads to jobs simply because it apportions either a higher or a lower amount of overheads to a
Can you think of two types of service provider that are vast businesses?
How can ABC help managers’ understanding of business operations and how can this lead to an improvement in performance?
What is the difference in the way in which direct costs are accounted for when using ABC compared to the traditional absorption costing approach?
Antonio Ltd has planned production and sales for the next nine months as follows:During the period, the business plans to advertise so as to generate these increases in sales. Payments for
Do you think that planning (including budgeting) within a business should be the responsibility of managers or accountants?
A nursing home, which is linked to a large hospital, has been examining its budgetary control procedures, with particular reference to overhead costs.The level of activity in the facility is measured
Can you think of any reason why most businesses prepare detailed budgets for the forthcoming year, rather than for a shorter or longer period?
The third point on the list of the uses of budgets (motivation) indicates that managers are set particular targets. Do you think there is a danger that requiring managers to work towards such targets
Linpet Ltd is to be incorporated on 1 June. The opening statement of financial position (balance sheet) of the business will then be as follows:During June, the business intends to make payments of
A sales manager has suggested that more units of a particular service could be sold if prices were lowered and that, overall, this would result in increased profits. This suggestion would lead to a
Newtake Records Ltd owns a small chain of shops selling rare jazz and blues records. At the beginning of June, the business had an overdraft of £35,000 and the bank had asked for this to be
The fourth point on the list of the uses of budgets (control) implies that current management performance is compared with some yardstick. What is wrong with comparing actual performance with past
Daniel Chu Ltd, a new business, will start production on 1 April, but sales will not start until 1 May. Planned sales for the next nine months are as follows:The selling price of a unit will be a
Can you think of any ways in which a short-term shortage of production facilities of a manufacturer might be overcome?
Looking at the cash budget of Vierra Popova Ltd, what conclusions do you draw and what possible course of action do you recommend regarding the cash balance over the period concerned?
What will be the loss of profit arising from the sales volume shortfall, assuming that everything except sales volume was as planned?
If you were the chief executive of Baxter Ltd, what attitude would you take to the overall variance between the budgeted profit and the actual one?How would you react to the five individual variances
Can you think of any arguments against allowing managers to have too much influence over setting their own targets?
Real World10.7 gives examples of the rates of return that are targeted by a number of well-known businesses.It goes on to look at average returns that have been earned by UK businesses over past
Beacon Chemicals plc is considering buying some equipment to produce a chemical named X14. The new equipment’s capital cost is estimated at £100 million. If its purchase is approved now, the
Some businesses may take up a less cautious financing position than that shown in Figure 11.9 and others may take up a more cautious one. How would the diagram differ under each of these options?
Helsim Ltd is a wholesaler and distributor of electrical components. The most recent draft financial statements of the business included the following:Notes:1. Land and buildings are shown at their
What other motive may business angels have for becoming closely involved in the business?
What benefits might a listed business gain from the Stock Exchange being an efficient capital market?
Why would you see £100 to be received in a year’s time as not equal in value to £100 to be paid immediately?
When managers are making decisions involving capital investments, what should the decision seek toachieve?
The directors of Mylo Ltd are currently considering two mutually exclusive investment projects. Both projects are concerned with the purchase of new plant. The following data are available for each
Chaotic Industries is considering an investment in a fleet of ten delivery vans to deliver its products to customers. The vans will cost £15,000 each, which will be payable immediately. The annual
Newton Electronics Ltd has incurred expenditure of £5 million over the past three years researching and developing a miniature hearing aid. The hearing aid is now fully developed. The directors are
A business is evaluating three competing projects whose profits are shown below. All three involve investment in a machine that is expected to have no residual value at the end of the five years.
C. George (Controls) Ltd manufactures a thermostat that can be used in a range of kitchen appliances. The manufacturing process is, at present, semi-automated. The equipment used cost £540,000 and
Sinclair Wholesalers plc is currently considering opening a new sales outlet in Coventry. Two possible sites have been identified for the new outlet. Site A has an area of 30,000 square metres. It
The accountant of your business has recently been taken ill through overwork. In his absence his assistant has prepared some calculations of the profitability of a project, which are to be discussed
What is the payback period of the Chaotic Industries project from Activity 10.2?Data from Activity 10.2Chaotic Industries is considering an investment in a fleet of ten delivery vans to deliver its
Can you see from the above why PP is not a complete answer to the problem concerning the timing of cash flows?
Can you identify the kind of risks that the business may face by buying a machine?
Given that the Billingsgate Battery Company could invest its money at a rate of 20 per cent a year, what is the present (immediate) value of the expected first year receipt of £20,000? In other
See if you can show that the Billingsgate Battery Company would find £27,778, receivable now, as equally acceptable to receiving £40,000 in two years’ time, assuming that there is a 20 per cent
What is the maximum the Billingsgate Battery Company should be prepared to pay for the machine, given the potential benefits of owning it?
What is the NPV of the Chaotic Industries project from Activity 10.2, assuming a 15 per cent opportunity cost of finance (discount rate)?Data from Activity 10.2Chaotic Industries is considering an
How would you interpret this result?
We should recall that, when we discounted the cash flows of the Billingsgate Battery Company machine project at 20 per cent, we found that the NPV was a positive figure of £24,190 (see p. 330). What
What is the internal rate of return of the Chaotic Industries project from Activity 10.2Data from Activity 10.2Chaotic Industries is considering an investment in a fleet of ten delivery vans to
Assume that a project has an IRR that exceeds the business’s cost of capital. Why might it be helpful to consider how much it exceeds it by?
The directors of Manuff (Steel) Ltd are considering closing one of the business’s factories. There has been a reduction in the demand for the products made at the factory in recent years. The
Which other investment appraisal method ignores the scale of investment?
Earlier in the chapter, we discussed the limitations of the PP method. Can you think of a reason why it remains a fairly popular method of investment appraisal among managers?
Trader Ltd is a wholesaler of imported washing machines. The business is partly funded by a bank overdraft and the bank is putting pressure on Trader Ltd to reduce this as soon as possible.Sales
Are retained earnings a free source of finance for the business? Explain.
How does it create an opportunity cost?
From the business’s point of view, ordinary shares represent a less risky form of financing than borrowing. Why is this?
Would you expect the returns to preference shares to be higher or lower than those to ordinary shares?
What do you think is the advantage for the business of having a floating charge rather than a fixed charge on its assets?
Can you suggest how a loan covenant might specify a minimum level of liquidity (the last bullet point in the list above) in the contract between the borrower and lender?
Would you expect the market price of ordinary shares or of loan notes to be the more volatile? Why?
Would you expect the returns on loan notes to be higher or lower than those of ordinary shares?
Why does the value of fixed-interest loan notes rise and fall with rises and falls in interest rates?
In Chapter 4 (Example 4.2 ) the point was made that issuing new shares at below their current value is to the benefit of new shareholders and to the detriment of existing ones. In view of this, does
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