Questions and Answers of Accounting Practice

Why might a company issue convertible preference shares rather than debentures?
The capital structure of two companies is as follows:The EBIT of both companies was as follows:The rate of corporation tax on profits is 25 per cent.a Calculate the net profit after-tax earned for
The directors of the Palazine Company are seeking funding of£50m to finance an expansion programme. The summarized financial statements for the most recent year are set out below:The following
The earnings per share and the dividend per share of Uppen Down plc for the last few years are shown below (in pence):a You are required to calculate the dividend cover for each year;the proportion
An extract of Sky High plc’s statement of financial position as at 1 October 20x6 is given below:On 1 January 20x7, the company issued 1 right share for every 5 in issue for £4 each when the
What is the minimum amount of funding with which it is possible to start a business? Could a business be started with zero funds?What sort of business could each member of the group start, with
Prepare a list of companies that are not currently paying dividends. (Look for shares with a zero yield in the Financial Times’s listing.) Why are these companies not paying dividends? Each member
Why are some companies high-geared, and others low-geared?Each member of the group should examine the statements of financial position of a number of companies, probably in different sectors. It may
Prepare a list of companies which have arranged bonus (scrip) issues in the last three months. (You can look at the Financial Times website for this information.) Note down the share price before and
Why might a company want high levels of working capital?
Can a company operate with zero or negative levels of working capital?
How would you detect overtrading, and why does it matter?
What steps can be taken to speed up the collection of receivables?Why might a company deliberately allow an increase in the time taken for receivables to pay?
What factors are taken into consideration in the conventional model for calculating economic order quantities (EOQs)?
How can a company avoid having liquidity crises?
The Congle Company uses 40,000 wongles a year. Each wongle costs £1.25 to buy; stockholding costs are estimated to be 32 per cent per annum of the cost of the inventory held; each order costs £20
Fleshwick Traders has a large overdraft on which interest of 17 per cent per annum is being charged. The directors are considering offering cash discounts to customers to encourage prompt
Stokeypokey Wholesalers Ltd is proposing to set up a branch in Northern Ireland. Experience elsewhere suggests that sales will start off at £100,000 a month in January, and then increase by£100,000
How can a company operate with minimum levels of working capital?
Working capital should be managed to maximize profitability.Explain and comment.
What steps can be taken to minimize bad debts?
What are the main limitations of the EOQ model?
The Scottish Cake Company has annual sales of £1,200,000.Annual non-current costs are £150,000 and last year’s profit was£50,000. At the year end the receivables figure was £100,000.The company
The summarized statement of financial position of the Warmel Trading Company as at 31 December last year was as follows:Last year sales amounted to £3,600,000 and net profit before tax was
The following information has been extracted from the most recent annual report and accounts of Greyhound Leather Manufacturers Ltd:a The finance director is pleased with the management of working
The directors of Woebun Standard Components plc have been very successful in persuading their customers to pay, on average, in one month. However, they believe that this policy is restricting sales
The Bonjarron Decorating Company uses 14,400 large-size cans of white gloss paint in a year. It uses different suppliers and on average pays £20 per can. It has limited storage space and reckons
Many small businesses may be seen as ‘overtrading’. Accountants are too conservative about such things. To be successful, a rapidly expanding small business needs to sail close to the wind.
Large businesses should not have working capital problems. It is easy for them to borrow large sums on a long-term basis. The problem for large businesses is not working capital; it is excessive
Discuss the effects on ‘just in time’ of increasing proportions of manufacturing (for the UK) taking place in Eastern Europe, Africa and Asia.
Can working capital, like manufacturing, be ‘outsourced’? Could a company operate with zero or negative capital employed, make some profits, and therefore have a ROCE of infinity?
Large companies can bully small customers to pay up promptly, while they need not bother paying their own bills on time. Small companies have to pay up promptly if they are to continue to receive
How does cash budgeting for a business differ from the way in which you do your own, personal cash budgeting. Should it differ?(Other than the amounts of money being very different!)
Distinguish between factoring and invoice discounting. Explain the circumstances in which a company considering these two forms of finance would be likely to prefer factoring rather than invoice
Complete the double entry for each of the following transactions:a The owner of a business pays additional capital to the company;the cash account is debited and it is credited to the __________.b A
Record the following transactions of A Florist using double-entry bookkeeping; summarize them in the form of a trial balance, and prepare an income statement for the month of January, and a statement
Record the following transactions of Moorey using double-entry bookkeeping; summarize them in the form of a trial balance, and prepare an income statement for the one-month period and a statement of
At 31 March 20X0, included in the trial balance of BC Limited were the following balances:The following additional information is given in relation to the y/e 31 March 20X1:It has been decided to
In preparing the trial balance, you notice that the debit side exceeds the credit side by £970. Upon investigation, you identify the following mistakes:1. Goods returned to suppliers amounting to
a Accountants cannot do their job effectively if they do not have a detailed understanding of the business’ bookkeeping systems.b Bookkeeping is done by technicians and computers; it is not a
The power of accountants and accountancy lies mainly in their control of the official financial recording system. Discuss.
A French balloonist landed in a field somewhere in the south of England. He hailed a passer-by and said, ‘Can you tell me where I am, please?’ The passerby said, ‘You are in a wicker basket in
What is the point of learning the principles of double entry and its application since generally, even in very small companies, the process of completing the accounting records and the preparation of
The trial balance of Noddy’s Business as at 31 December year 6 is as follows:Prepare an income statement for the year ended 31 December year 6, and a statement of financial position as at that
The trial balance of Mona Ramsey as at 30 September year 3 was as follows.Adjustments a Closing inventory as at 30 September year 3 amounted to £15,000.Prepare an income statement for the year ended
The trial balance of E. Zee’s Business as at 31 December year 7 was as follows.Prepare an income statement for the year ended 31 December year 7, and a statement of financial position as at that
The trial balance of Isabella Stanley as at 31 March year 9 was as follows:Adjustments a Closing inventory as at 31 March year 9 amounted to £22,000.Prepare an income statement for the year ended 31
Andreas, Jude and Sandy are in business together, sharing profits in the proportion 3 : 2 : 1. Their partnership agreement provides for interest on their fixed capital balances of 8 per cent per
Would you rather be in business as a sole trader, in a partnership, or in a company? Why?
What are the various ways of sharing profits between partners, and why are they used?
Is there, or should there be, a standard format for the financial statements of unincorporated businesses? Why or why not?
Why is there a need for ‘adjustments’ to a trial balance at the year end?
Bookkeeping records transactions; trial balances, statement of financial positions and income statements summarize and present the results of those transactions. It is unrealistic to expect such
What are the three main sources of finance for businesses?
What are the main differences between preference shares and ordinary shares?
Explain the advantages and disadvantages of a company increasing its gearing.
You are given the following information about two companies:a You are required to calculate for each company for each year:i capital gearing ratio;ii interest cover;iii dividend cover;iv proportion
Explain what factors affect a company’s dividend distribution in a year.
Complete the double entry for each of the following transactions:a Sales made for cash are credited to the sales account and debited to the __________.b Sales made on credit to Smith are debited to
Which of the following accounts normally have a credit balance (as shown on a trial balance): sales, purchases, trade receivables, trade payables, non-current assets, share capital, share premium?
Which of the following accounts normally have a debit balance (as shown on a trial balance): expenses, non-current assets, receivables, cash at bank?
Which of the following statements is true?a Accounts for assets and expenses have credit balances.b Accounts for liabilities, share capital, retained earnings and overdrafts have credit balances.
Record the following transactions of Carlos using double-entry bookkeeping; summarize them in the form of a trial balance, and prepare an income statement for the three-month period, and a statement
Record the following transactions of Killip using double-entry bookkeeping; summarize them in the form of a trial balance, and prepare an income statement for the one-month period and a statement of
Cass Hawin’s bookkeeper had not balanced the cash book on 31 March year 7. It received a bank statement, dated 31 March year 7, which showed an overdraft of £2,000. Further investigation revealed
Calculate the 20 ratios for Marks and Spencer plc for 2011 to complete the table in Illustration 7.2, and write a report on the company’s financial position and performance based on those ratios.
What accounting information is most useful in assessing a company’s solvency?
The summarized statements of financial position of Grand plc and Pony plc at 31 December year 6 were as follows:Grand bought 60 per cent of the shares of Pony on 31 December year 3. At that date
What key information is disclosed to assess the profitability of the various segments of a company?
Calculate the appropriate ratios for Marks & Spencer for 2011 to complete the Table in Illustration 7.9, and comment on the figures produced.
You are given the following information about Gobbiediggan International plc:Making use of appropriate ratios, comment on the performance of each of the geographic segments.One of the directors of
Calculate the Z-score for Marks and Spencer for 2010 and 2011.What are the main reasons for the change between 2010 and 2011?
Select one or two companies’ annual reports and accounts and assess the financial position and performance of its various segments and investments in as much detail as the information permits.
If a company analyses the ROCE of every division, branch, investment or segment that it operates, and closes down all those with a below average ROCE, then the average ROCE for the company as a whole
The summarized statements of financial position of Yourow plc and Sentus Ltd at 31 December year 6 were as follows:Yourow bought 75 per cent of the shares of Sentus on 31 December year 2. At that
You are given the following segmental information about the Willaston Company:Making use of appropriate ratios, comment on the performance of each of the segments. Segment Men's things Women's things
You are given the following information about the Goodwynne Company:Making use of appropriate ratios, assess the view that the company should concentrate on reducing its operating assets. Year 2 Year
Interpretation of accounts tends to concentrate on statements of financial position, income statements and cash flow statements.Critically assess the value of other information included in annual
What information would you like to see disclosed in company annual reports and accounts in addition to that which is at present required? Examine the annual report of a few companies that provide a
It is possible to calculate an almost infinite number of ratios from a company’s annual report. What ratios other than the 20 emphasized in this chapter do you think would be useful? Why?
Think of a number of companies, or types of company, that have gone bankrupt or have found themselves in serious financial difficulties recently (perhaps airlines, banks or retailers). What do you
It is unrealistic to assess the performance of a company on the basis of one figure, such as EPS. To what extent do the complexities in producing this figure undermine its usefulness?
Companies that generate cash surpluses can afford to diversify, but they should return the money to the shareholders, and it is for the shareholders to decide the extent to which they wish to
Z-scores are only the beginning. Sophisticated statistical models that produce accurate predictions of share prices are becoming available.Discuss the practicability, limitations and implications of
In what areas of accountancy has there always been a need for subjective judgement, and scope for creative accounting?
Give examples of techniques that have been used in ‘creative accounting’.
Is creative accounting illegal?
In what ways can accounting standards be improved to restrict creative accounting?
In what ways have auditors been criticized for lack of independence?
The Platto Company produced the following draft income statements in early January year 9, shortly before being taken over by the Uppit Company in February year 9.In February year 9 the Uppit Company
What information could annual reports include about the social performance of companies?
In what ways are the problems of creative accounting being tackled at present?
What more radical solutions do you think should be considered?
In what areas is it particularly difficult to restrict creative accounting?
Examine the case for more government involvement in the setting and enforcing of accounting standards, and in the regulation of auditors.
What is likely to happen to a company that overstates its profits year after year?
Why should ‘corporate social reporting’ be considered as being part of the responsibility of accountants?
With regard to environmental issues, should accountants be more involved in:a Management accounting-type measurement of costs and impacts; or b External reporting?
Obtain the annual reports of four companies, two being major, well-known companies, and two being much smaller. Compare the reports in terms of the public relations material and ‘spin’ that they
A company has a duty to maximize reported profits. If it uses creative accounting techniques to do so, it does not matter, as long as those profits have credibility. Discuss.

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