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financial accounting theory
Questions and Answers of
Financial Accounting Theory
If the average cost method of inventory (stock) valuation is used, what is the cost per DVD player at closing inventory (stock)?(a) £109.70(b) £114.00(c) £120.60(d) £122.50The following
If the last-in, first-out (LIFO) method of inventory (stock) valuation is used, what is the amount of closing inventory (stock)?(a) £1,400(b) £1,470(c) £1,540(d) £1,680 The following information
Which of the following methods of inventory (stock) valuation will result in the highest cost of sales during a period of rising prices and constant or rising volumes of inventories (stocks)?(a)
The Ash Company has an inventory (trading stock) that includes the following three items: Description Tables Chairs Beds Purchase cost 4,500 3,000 5,300 Selling price 3,250 2,800 5,500 Distribution
On 1 April Year 1, a company paid £2,800 in advance for 1 year’s fire insurance. On the financial statement date of 31 December, what is the correct accounting treatment for this information?(a)
What is the resultant figure for trade receivables (debtors), after deducting the provision for doubtful debts, that will appear in the statement of financial position (balance sheet)of the company
What is the resultant figure for trade receivables (debtors), after deducting the provision for doubtful debts, that will appear in the statement of financial position (balance sheet)of the company
What would be the total expense for bad and doubtful debts appearing in the company’s income statement (profit and loss account) for Year 2?(a) £250(b) £500(c) £1,000(d) £1,500The following
On reviewing the financial statements, a company’s accountant discovers that 20 per cent of the trade receivables (debtors) are irrecoverable. What will be the effect on the income statement
On reviewing the financial statements, a company’s accountant discovered that an annual rental of £5,000 paid by the company in advance on 30 June Year 2 had been treated in full as an expense for
As financial accountant of a company you discover the following three items of information at the end of the financial year. Which would lead to a provision for doubtful debts, and which would lead
How would the figures in Table 9.5 change if the company had paid £1,200 on 1 September rather than 1 October? Table 9.5 Spreadsheet recording prepayment of insurance at the financial year-end date
What is the performance obligation in each of the following cases?• A car manufacturer provides a new car for a dealer to sell, but the dealer is not required to pay the car manufacturer until the
Ocado Group plc: reporting inventory Ocado- How?Established in 2000 and listed on the London Stock Exchange in July 2010, Ocado is the world’s largest dedicated online grocery retailer, with over
The Table Company continues trading during Year 4. The customers who were doubtful at the end of Year 3 respond to enquiries and pay the amounts due. No adjustment is made to the provision for
On 1 September Year 1, a company paid £1,800 as an insurance premium to give accident cover for the 12 months ahead. The accounting year-end is 31 December.Required:Prepare an accounting equation
A fire destroyed a company’s detailed records of inventory (stock) and much of the merchandise held in inventory (stock). The company accountant was able to discover that stock at the beginning of
Canyon Ltd uses FIFO stock valuation. Canyon has recently been acquired by a US parent company. The directors in the US wish to know what the profits of the past 5 years would have been if LIFO stock
It is the policy of Hellebore Ltd to make provisions for doubtful debts at a rate of 15 per cent per annum on all debtor balances at the end of the year, after deducting any known bad debts on the
Discuss the problems of comparability of revenue recognition based on the following information:In the UK film and television industry, a range of accounting practices has been used in recognising
Which of the following is/are normally treated as a contingent liability?(i) The corporation tax liability for the reporting period(ii) Claim for damages by a customer, where the reporting company
On reviewing the financial statements, the company’s accountant discovers that a payment of £21,000 made to a supplier has been incorrectly recorded in the cash book and in other internal
Which of the following items would appear in the current liabilities section of a statement of financial position (balance sheet)?(a) Increase in the provision for doubtful debts(b) Salespersons’
Which of the following items would not appear in the current liabilities section of a statement of financial position (balance sheet)?(a) Accrued wages(b) Prepaid business rates(c) Tax payable(d)
Black Ltd commenced trading on 1 September Year 3 and is preparing its accounts for the year ended 31 August Year 4. During its first year of trading, the company pays total telephone company
Metals Ltd has begun to employ an office-cleaning company on 1 January. The charge for 4 months’ worth of cleaning services is £1,200. The office-cleaning firm sends an invoice every 4 months, on
Turn to the annual report of a listed company that you have used for activities in previous chapters. Find every item of information about current liabilities. (Start with the financial statements
The statement of financial position (balance sheet) of an electricity company includes in current liabilities the item: ‘Prepayments by electricity consumers’ Explain why this item is a current
The statement of financial position (balance sheet) of a furniture retail company includes in current liabilities the item: ‘Deposits received from customers’ Explain why this item is a current
The accountant of Blue Ltd discovered the following documents in a file marked ‘not yet dealt with’ at the company’s year end of 31 December Year Explain the accounting treatment required for
Read again the Real World Case. As an investor in the company, what further information would you need to help you form an opinion on the liability to suppliers?Data from Real World Case EasyJet
David discusses the risks relating to reported current liabilities. He does not include the risk that a liability is omitted altogether. What would be the effect on reported profit of omitting a
Write down the documentation you would expect to see as evidence of the money amount of the following liabilities:• bank overdraft;• amount owing to a trade supplier
Write down five types of transaction where you might expect to see an accrual of expense at the year-end. Against each transaction type write down the method you would use to estimate the amount of
The corporation tax liability of a company is based mainly on profits earned in the UK.How easy or difficult would it be to identify profits earned in the UK where a company is trading world-wide on
EasyJet 2016: relationship with suppliers What we do: Low-cost European point-to-point airline We use our cost advantage and number one and number two network positions in strong markets to deliver
Analyse the following information and enter it in a spreadsheet to show analysis of the impact of the information on the accounting equation: Jan. 1 Year 1 During Year 1 Jan. 1 Year 2 During Year 2
What is the justification for reporting deferred income under the category of liability?
A news alert contains the following statement: Telecoms plc this week raised cash by selling $50m bonds with five-year and ten year maturities. Explain each part of the sentence.
Which of the following will not normally be found under the heading ‘Liabilities due after 1 year’?(a) Deferred taxation(b) Unsecured loan(c) Bank overdraft(d) Provision for reorganisation costs
Which of the following most accurately describes an item of ‘Deferred Income’?(a) Income reported in the income statement (profit and loss account) that has not yet been earned.(b) Services
Which is the most accurate description of a ‘Deep discounted bond’?(a) A security issued at a price higher than its repayable amount on which interest is paid at market rates during the period of
What is the impact on the accounting equation while establishing a provision for the estimated cost of a 3-year warranty scheme for goods sold?(a) Increase liabilities: decrease ownership interest
Which of the following statements is/are correct?(i) All debentures are secured on the property of a company.(ii) Debenture holders have a right to receive interest payments each year.(iii)
Which of the following is the most accurate definition of the term ‘a floating charge’?Is it(a) An agreement to buy foreign currency at a fixed future date at an agreed price.(b) A procedure
Imagine you are a shareholder in a company which is financed partly by long-term loans. Write down the information needed by users in the order of importance to you as a shareholder and explain your
David and Leona are discussing four types of long-term liability: deferred tax, warranties, deferred consideration, and provisions for restructuring. From their conversation, why is an investor
Look back to the Real World Case at the start of the chapter. The accounting policies for two types of provision are explained in detail. They can be summarised by reference to the accounting
Consider a grant received as a contribution to staff retraining costs over the next three years. Write down three arguments in favour of reporting the entire grant in the income statement (profit and
BP at a glanceWe are a global energy company with wide reach across the world’s energy system. We have operations in Europe, North and South America, Australasia, Asia and Africa.Extracts from
Peter (Television) Ltd gives a 2-year labour and parts warranty on all television sets that it sells. The company has the following revenue for its first 2 years of trading:Based on the level of
Home Bakeries Ltd receives a training grant to cover staff training costs that will be incurred evenly over the next 2 years. Explain the accounting treatment.
The following information is taken from the annual report of a major listed company. Write a short explanation that is suitable for a private shareholder who does not have specialist accountancy
The following information is taken from the notes of the statement of financial position (balance sheet) of a listed company. Write a short explanation that is suitable for a private shareholder who
Explain why the following item is reported as a contingent liability and not as a provision.‘Under the Value Added Incentive Scheme, which is currently under review by the Board, further amounts
What is the relationship of ‘net assets’ to ‘ownership interest’?
Which of the following items is/are likely to be found in a company’s statement of changes in equity?(i) Dividends paid(ii) Surplus on revaluation of non-current (fixed) assets(iii) Premium on the
Which of the following methods of issuing shares will have no impact on the overall amount of ownership interest in a company’s statement of financial position (balance sheet)?(a) Rights issue(b)
Which of the following items is/are likely to be found in a company’s ‘Statement of changes in equity’?(i) Dividends received(ii) Exchange rate adjustments(iii) Impact of a revaluation of
Which of the following is an accurate statement regarding dividends?(a) A company must declare an ordinary dividend if it makes a profit in an accounting period.(b) The directors of a company have
Which of the following is a correct description of the term ‘share option’?(a) Provides a person with the right to buy shares in a company at a future date at an agreed fixed price.(b) Name given
On reviewing the financial statements, the company’s accountant notices that the capitalization issue of 1 for 5 ordinary shares made by the company in December Year 2 has not been reflected in the
On reviewing the financial statements, the company’s accountant notices that the rights issue of 1 for 3 ordinary shares made by the company in December Year 2 has not been reflected in the
Which of the following items would not appear in the section of the statement of financial position (balance sheet) headed ‘Capital and reserves’?(a) Share premium(b) Preference shares(c)
Which of the following will normally be included in the ‘Capital and reserves’ section of a company’s statement of financial position (balance sheet)?(i) Convertible loan stock(ii) Deferred
City Centre plc has owned a block of offices for many years. The building is recorded in the statement of financial position (balance sheet) at £750,000, the historical cost being £900,000 less
Suppose the block of offices in question B12.7 was to be valued by a professional expert at £640,000. What effect would this information have on the reported financial statements?Data from B12.7City
The Real World Case at the start of this chapter gives an example of a revaluation that has occurred through an increase in infrastructure assets. What might be the infrastructure assets of a water
Suppose you note that a company has revalued its land and buildings as reported in the statement of financial position (balance sheet). What evidence would you expect to see as justification for the
The Real World Case at the start of this chapter explains how the company decides on its dividend policy. What do we learn about the discretion that can be exercised by a company in deciding its
A newspaper reports the announcement of a share repurchase plan in a company which provides engineering services to the aerospace industry. The chief executive officer has said ‘This new share
Thames Water plcThames Water is one of ten regional licensed and regulated companies providing water and wastewater services in England and Wales. With 15 million customers we serve about 25% of the
This exercise tests your understanding of all aspects of accounting learned till the end of Chapter 12 and tests your ability to use an accounting equation spreadsheet for recording the transactions
This exercise tests your understanding of all aspects of accounting learned till the end of Chapter 12 and tests your ability to use an accounting equation spreadsheet for recording the transactions
The following table sets out business transactions and events for Chris Brown LtdRequired:(a) Using the accounting equation spreadsheet provided, record the effect of each transaction and events of
Which of the following is the most accurate definition of return on shareholders’ equity?(a) Profit after tax as a percentage of share capital(b) Profit after tax as a percentage of share capital
What is the formula for calculating the price–earnings ratio?(a) Profit after tax for ordinary shareholders divided by number of ordinary shares(b) Number of ordinary shares divided by profit after
A company has acquired a major new piece of equipment immediately before the yearend.The cost is £100,000, part of which is financed through the issue of £50,000 debentures and the rest by taking
The current ratio is greater than 1:1. What would be the impact on the company’s accounting ratios while buying an extra 3 weeks of goods from suppliers on credit and immediately before the year
The following information is available about two companies, A Ltd and B Ltd.Which of the following statements is correct while making a comparison of company A with company B?(a) Company A has the
The following information is available about two companies, A Ltd and B Ltd.Which of the following statements is correct while making a comparison of company A with company B?(a) Company A has the
The following information is available about two companies, A Ltd and B LtdWhich of the following statements is correct while making a comparison of company A with company B?(a) Company A has the
The following information is available about two companies, A Ltd and B Ltd.Which of the following statements is correct while making a comparison of company A with company B?(a) Company A has the
What is the assumed behaviour of a risk-averse investor?. What view might a risk-averse investor take of the interaction of these two types of risk?
Which side of the pyramid of ratios concentrates on profitability? Which side concentrates on efficiency? How can a business earn a high return on capital employed despite low profit margins?
Z-scores, M-scores and other similar indicators are usually found in private reports from investment advisers to their clients. The newspaper article reproduced in this section points out that the
Calculate ratios for Andrew Hunt plc and evaluate by comparison with the industry average.Dividend proposed for the year is £150,000 or 10 pence per share.The market price of the ordinary shares of
Calculate ratios for Ed’s Enterprises and evaluate by comparison with the ratios calculated for Andrew Hunt plc in B13.3.Data from B13.3Calculate ratios for Andrew Hunt plc and evaluate by
The summarised version of the Year 7 accounts of Worldchem plc is shown below along with comparative figures for the previous year. Most of the notes in the accounts, which give further details about
Prepare a full ratio analysis and commentary for Craigielaw using the form. Assume that a share price of 160 pence is applicable at both year-end dates. Industry average ratios for both Year 7 and
Operating profit marginsThe following extracts show the different ways in which three companies report their operating profit margins (operating profit as a percentage of sales). This ratio is an
Which of the following is a correct statement about the strategic report?(a) A forward-looking aspect is not permitted.(b) A forward-looking aspect is encouraged.(c) The content of the strategic
Which of the following is a correct statement?(a) There is a business directory which defines all segments of all companies.(b) The decision on defining segments for reporting is a matter for the
. Which of the following is an example of off-balance sheet finance?(a) The unconditional sale of a building to an unrelated company.(b) Borrowing on overdraft from a bank.(c) Borrowing secured on
Which of the following statements describes the Global Reporting Initiative?(a) A law that applies throughout Europe requiring international accounting standards to be used.(b) A law that applies
Which of the following describes the Combined Code?(a) A Code of practice for auditors setting the auditing standards to be applied in any company audit.(b) A Code of practice explaining how
Which of the following statements is correct?(a) Directors are responsible for preparing the financial statements of a company to present a true and fair view.(b) A qualified audit report ensures
Which of the following statements is correct?(a) The replacement cost of an asset is normally regarded as a more reliable measure than historical cost.(b) Historical cost is rarely used by companies
How much of the information suggested for the strategic report is extracted directly from the financial statements?How much of the information suggested for the strategic report provides additional
Off-balance sheet finance is one example of information which would never come to the attention of the users of financial statements but for the concern of some auditors. Make a list of other types
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