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financial accounting theory
Questions and Answers of
Financial Accounting Theory
Write down the accounting equation: Assets minus Liabilities equals Ownership interest. Suppose you are the accountant for an oil company and you have been asked to record the full liability for
Obtain the annual report of a listed company. Turn to the report on corporate governance. What does the company say about corporate governance and about compliance with the Corporate Governance Code?
Look at the items you possess. These might include a house or a flat or a car, but equally well they could be a bicycle and some modest items of furniture. Whatever their nature, write down on a
Imagine you are planning to invest in a listed company manufacturing high quality footwear. There is a strong family representation on the board of directors and the company has a strong reputation
What is your view on the extent to which accounting practice should be neutral in its treatment of stakeholders, and the extent to which it should be the result of ‘political’ pressure from those
(a) Explain the nature and purpose of the strategic report. (150 words)(b) Discuss the benefits and potential problems of the strategic report from the viewpoint of (i) managers preparing the
(a) Explain the nature and purpose of segmental reporting. (150 words)(b) Discuss the benefits and potential problems of segmental reporting from the viewpoint of(i) managers preparing the segmental
(a) Explain what is meant by ‘off-balance sheet finance’. (150 words)(b) Explain the problems of making comparisons of accounting information for companies in two countries where country A allows
(a) Explain what is meant by ‘corporate social responsibility’. (150 words)(b) Explain why reporting of corporate social responsibility is seen as important to a study of accounting. (150 words)
(a) Explain the nature and purpose of the Combined Code of Corporate Governance. (150 words)(b) Explain why a report on directors’ remuneration is important as a part of the annual report of a
(a) Explain the responsibilities of directors and auditors in relation to presenting financial statements that convey ‘a true and fair view’. (150 words)(b) Give three examples of accounting
(a) Explain the limitations of historical cost accounting. (150 words)(b) Compare entry price and exit price as measures of value that could be used as alternatives to historical cost accounting.
Weir Group plc: business modelOur business model is designed to generate long-term sustainable value. We focus on mission-critical and highly engineered equipment with intensive aftermarket care and
Find the annual report of a large listed company. (The Financial Times carries lists of major companies and, in particular, lists the largest 100 companies in a list called the FTSE 100 companies.
The following technical terms are used. Check that you understand the meaning of each.• accountancy firm• accountancy profession• accounting• audit manager• business entity• conceptual
The following technical terms are used. Check that you understand the meaning of each.• business entity• conceptual framework• financial reporting standards• financial statements• listed
The following technical terms are used. Check that you understand the meaning of each.• external reporting• financial accounting• internal reporting• management accounting.
The following technical terms are used. Check that you understand the meaning of each.• articles of association• capital• Companies Act• directors• dividend• entity• HM Revenue and
The following technical terms are used. Check that you understand the meaning of each.• annual report• cash flow projections• creditors• default• dividend• equities analyst• fixed
The following technical terms are used. Check that you understand the meaning of each.• agency• agency theory• general purpose financial statements• portfolio• primary users.
Which of the following entities has an ownership interest that is divided into individual shares and profits, distributed to owners by means of the payment of dividends?(a) A school in state
A company incorporated under the Companies Act has a legal obligation to supply annual accounts to which of the following?(a) Its customers(b) Its employees(c) Its shareholders(d) Its suppliers
Which of the following statements is/are correct?(i) Shareholders of a company appoint the directors of that company.(ii) The shares of all limited companies are listed on the Stock Exchange.(iii)
An investor has bought shares in a limited liability company. The business subsequently fails and is unable to pay employees’ wages or government tax bills. Which of the following statements is
Legal disclosure requirements imposed on limited companies act primarily to safeguard the interests of which of the following:(i) employees(ii) the general public(iii) shareholders(iv) long-term
‘Accounting is the process of identifying, measuring and ……………………. financial information about an entity to permit informed judgements and decisions by users of the
Which of the following are forms of limited liability companies?(i) Sole trader limited companies(ii) Private limited companies(iii) Public limited companies Is it(a) (i) only(b) (ii) only(c) (i)
Which of the following statements about partnerships are correct?(i) Partnership agreements must be in writing.(ii) Partnerships are obliged to make accounting information available to the
Which of the following statements about a limited company are correct?(i) There is no upper limit to the number of shareholders.(ii) Companies make information available through the Registrar of
Which of the following statements about a public limited company is correct?(i) It must have a minimum of five directors.(ii) It may offer its shares to the public.(iii) There is no minimum share
Which of the following statements about users of accounting information is correct?(i) Most of the investment in shares through the Stock Exchange in the United Kingdom is carried out by individual
Which of the following statements is/are correct?(i) There is a general agreement that one general-purpose financial statement can meet the needs of users.(ii) Preparers of general-purpose financial
‘The view taken in agency theory is that there is an inherent conflict between the …………… as principal and the managers as agent and so they spend time agreeing contracts which will
Which of the following statements is/are accurate?(i) An equities analyst is a person who investigates and writes reports on ordinary share investments in companies.(ii) A broker is a member of a
Which of the following statements relates to a limited liability partnership (LLP)?(a) The partners have unlimited liability.(b) Annual accounts are filed with the Registrar of Companies.(c) Members
Find a website of a major listed company. (For example, many companies now give their website on their products – check your cornflakes packet or coffee jar. You can also find company websites
Read the dialogue between David and Leona in Section 1.8. What criticism does David make about annual financial reports?Data from dialogue DAVID: This week I've made three visits to companies,
The following is an extract from a newspaper article in the financial press. ‘Investors are becoming increasingly dissatisfied with annual reports because these are backward-looking, historical
The following is an extract from the client information leaflet of an accountancy firm.‘We can add value to your company’s annual report. We can show you how to identify the factors that add
Most conceptual frameworks start with the question: Who are the users of financial statements? The frameworks then assume that we know the information needs of those users. Assume you are the owner
“Accounting standards aim to portray economic reality, rather than shape it.” This statement appears in a document entitled ‘Working in the public interest’. The definition of accounting
Two brothers are planning to set up a computer repair business together. They need to decide whether to work in partnership or whether to form a limited liability company. From an accounting and
Read again the Real World Case at the start of the chapter. In the extract on ‘How do we judge the impact of our work’, the report sets out the tools used to monitor, evaluate, assess and learn
In this conversation, David questions the usefulness and relevance of published financial statements because of the time taken to publish them. Leona defends the rigorous audit scrutiny. Would David
Explain how historical cost measurement differs from fair value measurement.
Is there any point in time where historical cost and fair value measurement are the same?
Which of the following is a correct statement of the accounting equation?(a) Assets plus liabilities equals ownership interest.(b) Assets minus liabilities equals ownership interest.(c) Assets equals
The following are possible descriptions of items that appear in statements of financial position (balance sheets):(i) Cash, described as a current asset(ii) Finished goods inventory (stock),
Companies acquire non-current (fixed) assets for a variety of reasons, including:(i) to act as a hedge against inflation(ii) to resell at a profit in the future(iii) to avoid holding cash
Which of the following is normally NOT a current asset?(a) Cash(b) Inventory (stock)(c) Vehicles(d) Trade receivables (debtors)
How many non-current (fixed) asset items are included in the list shown below?(a) One item(b) Two items(c) Three items(d) Four items The following is a list of items that may appear in the annual
How many current liability items are included in the list shown below?(a) One item(b) Two items(c) Three items(d) Four itemsThe following is a list of items that may appear in the annual financial
How many non-current (fixed) asset items are there included in the list shown below?(a) One item(b) Two items(c) Three items(d) Four itemsThe following is a list of items which may appear in the
How many current asset items are there included in the list shown below?(a) One item(b) Two items(c) Three items(d) Four itemsThe following is a list of items which may appear in the annual financial
Classify each of the items in the following list as an asset, a liability or neither an asset nor a liability. Explain whether each item identified as an asset or a liability would meet the
Read the dialogue between David and Leona in Section 2.12. What errors can occur in reporting the amount of ‘inventories’ (stocks) in financial statements?Data from Section 2.12 DAVID: I've now
The following information has been gathered from the accounting records of Jonathan’s Hair Stylists.Using the accounting equation, calculate(a) the amount of ownership interest at 30 September Year
The Financial Reporting Council (FRC) in the UK has set out an accounting standard for micro-entities, which are the very smallest companies. Typically they have fewer than 10 employees. One
Most people think about their personal liabilities in historical cost measures. What are the forms of personal or household liabilities commonly found?
How does the ownership interest in a business increase or decrease after the business has started operating?
What kinds of error, either deliberate or intentional, can lead to overstatement of assets? What is the effect on the accounting equation? How do auditors check for evidence of overstatement of
Which of the following is equal to ownership interest if it is assumed that there are no long-term liabilities?(a) Current Cassets + current liabilities(b) Non-current (fixed) assets + current
What is the amount of total current assets?(a) £125,000(b) £150,000(c) £180,000(d) £255,000Black and Partners has listed the following amounts in its statement of financial position (balance
What is the amount of total non-current (fixed) assets?(a) £75,000(b) £105,000(c) £130,000(d) £190,000Black and Partners has listed the following amounts in its statement of financial position
What is the amount of total current liabilities?(a) £35,000(b) £40,000(c) £50,000(d) £60,000Black and Partners has listed the following amounts in its statement of financial position (balance
What is the amount of the ownership interest?(a) £65,000(b) £85,000(c) £170,000(d) £190,000Black and Partners has listed the following amounts in its statement of financial position (balance
Suggest an argument to support having businesses report quarterly (every three months) rather than once in each year.
Explain how the calculation of profit and operating cash flow provide different but complementary information, using Table 3.8 as your source of information. Table 3.8 Comparison of profit and
What is your opinion on the relative usefulness of the cash flow statement, compared to the statement of financial position and the income statement?
Prepare a statement of financial position (balance sheet) from the following list of assets and liabilities using the accounting equation to deduce the ownership interest as the missing item. Amounts
Explain how the statement of financial position (balance sheet) prepared in B3.3 will change for each of the following transactions?(a) The full amounts of £5,000 due from customers are received.(b)
Which of the following entities is required to apply the accounting requirements of the Companies Act?(a) Partnership(b) Sole trader(c) Limited company(d) A museum owned by a local government
Consider the following comments regarding the position of auditors of limited companies.(i) The audit opinion applies to all parts of the annual report.(ii) Auditors have a responsibility to detect
In the UK, the level of disclosure in financial statements is primarily influenced by a combination of(i) accounting standards(ii) financial services authority listing rules(iii) employers’ desires
Which of the following statements about the UK Corporate Reporting Council is/are correct?(i) The aims of the UK Corporate Reporting Council are to establish and improve standards of financial
In determining the profit of an entity which of the following measurement principles states that revenue and expenses are recognised as they are earned or incurred and not as money is received or
In determining the profit of an entity, which of the following measurement principles states that it is assumed the enterprise will continue in operational existence for the foreseeable future?(a)
Which of the following statements is correct?(a) The Financial Reporting Council is a UK government department.(b) The Financial Reporting Council is the UK’s independent regulator for corporate
Which of the following is/are correct in relation to UK limited companies?(a) Accounting information must be made public through the Registrar of Companies.(b) Accounting information requirements
Which of the following statements explains why ‘reliability’ does not appear in the 2018 Conceptual Framework of the IASB?(a) Reliability is no longer seen as a key feature of financial
Which of the following statements is/are correct?(a) The Conduct Committee (previously the Financial Reporting Review Panel(FRRP)) was established by the Financial Reporting Council.(b) The Conduct
Which of the following statement is/are correct?(a) All pages of the annual report of a typical public company are heavily regulated by the company law.(b) The auditors are responsible for preparing
Which of the following statements is correct?(a) Customers have a right of access to the day-to-day accounting records of limited companies.(b) Directors have a right of access to the day-to-day
Which of the following statements is/are correct?(a) The shareholders appoint the auditors.(b) The auditors’ code of practice is called Accounting Standards.(c) The auditor has a legal obligation
An audit is planned and performed to ‘give a ………. assurance that the accounts are free from ………… misstatement’.Which of the following pairs of words correctly completes the above
Suggest reasons for the existence of more than one source of regulation of financial reporting by listed companies.
Explain why it is essential to have a statement of financial position (balance sheet), income statement (profit and loss account) and statement of cash flows in the annual report of a listed company.
Analyse each of the following transactions to show the two aspects of the transaction: Apr. 1 Apr. 1 Apr. 2 Apr. 3 Apr. 4 Apr. 15 Apr. 20 Apr. 21 Apr. 29 Apr. 29 Apr. 30 Apr. 30 Jane Gate commenced
Which of the following reflects the effects of a payment to creditors on the accounting equation?(a) Assets decrease: ownership interest decreases.(b) Assets decrease: ownership interest
Which of the following reflects the effect of a purchase of an item of plant and equipment, for cash, on the accounting equation?(a) Assets increase: ownership interest decreases.(b) Assets decrease:
Which of the following economic actions reduces the amount of ownership interest?(a) A payment of administration wages(b) A receipt of cash from trade receivables (debtors)(c) A receipt of a loan
Which of the following economic actions increases the amount of ownership interest?(a) A purchase of raw material on credit(b) The provision of a service to a customer on credit(c) A payment for a
Which of the following economic actions decreases the amount of current assets?(a) A payment for rent in advance of occupancy of the property(b) A purchase of equipment on credit(c) A purchase of
What is the amount of current assets at the end of Day 1?(a) £5,000(b) £8,000(c) £15,000(d) £18,000The following information about Day 1 applies to question.Day 1T Harding and Co has commenced
What is the amount of ownership interest at the end of Day 1?(a) £10,000(b) £15,000(c) £23,000(d) £28,000The following information about Day 1 applies to question.Day 1T Harding and Co has
What is the amount of cash at the end of Day 2?(a) £8,800(b) £16,800(c) £21,800(d) £24,800 The following information about Day 2, together with the previous information about Day 1, applies to
What is the amount of non-current (fixed) assets at the end of Day 2?(a) £4,000(b) £5,000(c) £9,000(d) £24,000The following information about Day 2, together with the previous information about
What is the amount of the ownership interest at the end of Day 2?(a) £17,800(b) £22,000(c) £27,000(d) £29,800The following information about Day 2, together with the previous information about
What is the amount of trade payables (creditors) at the end of Day 3?(a) Nil(b) £4,100(c) £7,000(d) £12,000 The following information about Day 3, together with the previous information about
What is the amount of non-current (fixed) assets at the end of Day 3?(a) £3,650(b) £4,400(c) £5,350(d) £8,600The following information about Day 3, together with the previous information about
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