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Questions and Answers of
Business Accounting
Shares bought on 1 January 2014 for £4,000 were sold on 31 December 2019 for £7,900. What was the rate of annual compound interest on the investment?
Should you accept an offer of £60,000 for your rights over the next 15 years to the £4,800 annual rent from shop premises you own and have leased to a local company? You could invest the £60,000
In relation to the rental income, what rate of interest does the offer made in Question 27.9 represent? Having made this calculation should you change your decision taken in Question 27.9?Data From
A condition of a seven-year loan of £70,000 is that the borrower will pay equal annual amounts into a sinking fund so that it accumulates at the end of the seven years to the amount of the loan. The
If the interest on the sinking fund in Question 27.11 were at 8%, how much would the annual payments into it be?Data From Question 27.11A condition of a seven-year loan of £70,000 is that the
What is the implied interest rate if equipment can be leased for four years at £10,000 per annum and the cash price is £36,000?
The annual rental payments on a finance lease are £16,000. If the rate of interest on borrowing for this purpose is 8%, what is the capital value of the lease?
What sort of ‘deviations from the norm’ do you think they may be looking for?
Five categories of accounting ratios were described in this chapter. What are they?
The only difference between the current and acid test ratios is that inventory is omitted from the acid test ratio. Why is it appropriate to remove inventory from the analysis?
Why should different groups of people be interested in different categories of accounting ratios?
Huge plc acquired a holding of 600,000 of the 800,000 ordinary £1 shares of Large plc on 1 October 2015 when the revenue reserves of Large stood at £320,000. On 1 October 2016, the directors of
Three companies have the capital structures shown below.The return on capital employed was 20% for each firm in 2016, and in 2017 was 10%. Corporation tax in both years was assumed to be 55%, and
Martha is the accountant of a trading business. During the past year she produced interim accounts for the six months ended 30 November 2015, and draft final accounts for the year ended 31 May 2016,
When an organisation operates in more than one sector, how do you identify other appropriate organisations with which to make comparisons?
John Jones is considering purchasing shares in one of two companies and has extracted the following information from the statement of financial position of each company.Required:(a) Define the term
Why might having to repay a loan in these circumstances be disastrous for a company?
The following are extracted from the statements of financial position as at 31 March 2017 and 31 March 2018 of Glebe Ltd:Required:(a) Calculate for each of the two years two ratios that indicate the
What effect would increasing income in this way have upon gearing?
Colin Black is considering investing a substantial sum in the ordinary shares of Jacks Ltd. Having some accounting knowledge he has extracted the following information from the accounts for the last
What effect would increasing non-current asset values in these ways have upon gearing?
The following information has been extracted from the accounts of Witton Way Ltd:Additional information:During the year to 30 April 2016, the company tried to stimulate sales by reducing the selling
You are presented with the following information for three quite separate and independent companies:Additional information:1 The operating profit before interest and tax for the year to 31 March 2018
The chairman of a family business has been examining the following summary of the accounts of the company since it began three years ago.The company’s products are popular in the locality and in
The following information is provided for Bessemer Ltd which operates in an industry subject o marked variations in consumer demand. Required:(a) The forecast dividends for each of the next
An investor is considering the purchase of shares in either AA plc or BB plc whose latest accounts are summarised below. Both companies carry on similar manufacturing activities with similar selling
The following are the summarised accounts for B Limited, a company with an accounting year ending on 30 September.Required:(a) calculate, for each year, two ratios for each of the following user
The following are the financial statements of D Limited, a wholesaling company, for the year ended 31 December:The following information should be taken into consideration.1 You may assume that:(i)
G plc is a holding company with subsidiaries that have diversified interests. G plc’s board of directors is interested in the group acquiring a subsidiary in the machine tool manufacturing
J plc supplies and fits car tyres, exhaust pipes and other components. The company has branches throughout the country. Roughly 60% of sales are for cash (retail sales). The remainder are credit
Company managers are aware that the readers of financial statements often use accounting ratios to evaluate their performance. Explain how this could lead to decisions which are against the
What are the two forms of earnings management? Provide examples of both.
What would cause a manager to engage in earnings management when doing so did not benefit the company the manager works for?
Why would a company with no debt covenants engage in earnings management?
LIFO is not permitted under IFRS. How does this affect the coal distributor’s ability to identify an appropriate value for its inventory?
What is the difference between capture theory and private interest group theory?
Why do you think the phrase ‘visible position’ is used here, rather than simply the word ‘position’?
What is the relationship between legitimacy theory, social contracts, and the stakeholders of an entity?
A bank uses a set of 20 questions to assess the financial position of applicants for loans. Since introducing this approach 5 years ago, it has found that only 1 per cent of loans granted have proved
If you were the senior loan officer in the bank in Question 30.3, would you support this suggestion?Data From Question 30.3A bank uses a set of 20 questions to assess the financial position of
A manager is responsible for monitoring his employer’s debt covenants. These are linked to the debt to equity ratio, which must not rise above 40 per cent. The manager has noticed that the draft
If the covenant in Question 30.5 was related to the price of the company’s shares, what steps could be taken to raise the price of its shares?Data From Question 30.5A manager is responsible for
What would be the long-term impact upon the company of the measures adopted in Questions 30.5 and 30.6?Data From Question 30.5A manager is responsible for monitoring his employer’s debt covenants.
Why is knowledge of double entry important in identifying whether some of these theories have correctly predicted behaviour?
Should accountants give the user groups the information they are asking for, or the information for which they should be asking?
Complete the following table by entering the appropriate valuation base in each unshaded box. Past Present Future Entry value Exit value
If you paid £1,000 for a computer, what value would you say it had?
Explain the relationship between deprival value; replacement cost; net realisable value; and economic value.
Summarise the potential flaws in this method.
What is the difference between current purchasing power (CCP) and current cost accounting (CCA)?
What flaw can you see in this method?
Which groups of users of published financial statements take precedence in the development of accounting standards? Why?
If you replaced the £1,000 cost of the widgets in the above calculation of profit with the £1,100 it will cost to replace it, does it remind you of any of the alternatives to historical cost
State whether you consider the following statements to be true or false:(a) During inflationary periods, historical cost financial statements do not reflect a true and fair view.(b) The preparation
Apart from the subjectivity in some of the adjustments made to the original figures, such as for depreciation, if you were asked for the main disadvantage of historical cost accounting, especially in
State whether you consider the following statements to be true or false:(a) The current cost of plant and machinery is likely to be its net realisable value.(b) A company should distribute dividends
What does the difference between the change under the historical cost convention and under the current cost convention of £1,000 (£1,500 - £500) – the monetary working capital adjustment –
What are the practical difficulties a company may encounter in ascertaining the current values of its assets?
Plant and equipment was purchased on 1 January 2016 for £64,000, when the relevant specific price index was 80. What is the current cost value of the asset at 31 December 2017 if the index at that
The plant and equipment, details of which are given in Question 32.4, is depreciated on a straight line basis at 12% per annum. The depreciation charge is based on year-end values. What is the
Calculate backlog depreciation at 31 December 2018 for the plant and equipment, the details of which are given in Question 32.5A.Data From Question 32.5The plant and equipment, details of which are
The statement of financial position of Aberdeen Ltd at 31 December shows the following balances:The relevant price indices for trade accounts receivable and trade accounts payable are:Required:Using
The historical cost of sales figure for Lemon Ltd for the year ended 31 December 2016 is calculated as follows:Price indices for inventory are as follows:Required:Assuming that purchases occur evenly
If the relevant price indices for trade accounts receivable and trade accounts payable are as follows, calculate the monetary working capital adjustment for Aberdeen Ltd, using the details given in
The statement of financial position for Glencoe Ltd at 31 December is given below (£000):Required:Using the above information, calculate the gearing adjustment percentage: Non-current assets Plant
The information given below has been extracted from the accounting records of Beechgrove Ltd for the year ending 30 June 2017. Prepare a statement showing the current cost operating profit to 30 June
The following information has been extracted from the accounting records of Barry Bucknell Ltd for the year ended 30 June 2016.Required:Prepare a current cost statement of profit or loss for Barry
During a period of inflation, many accountants believe that financial reports prepared under the historical cost convention are subject to the following major limitations:1 Inventories are
You are presented with the following information relating to Messiter plc:Required:(a) Using the historical cost financial statements and stating the formulae you use, calculate the following
Using the following statement of financial position and statement of profit or loss, calculate ten accounting ratios (each to 2 decimal places). Comment on each ratio calculated (ignore taxation).The
In respect of each of the following events, select all the effects resulting from that event that are shown in the list of effects:(i) A bad debt written off;(ii) An increase in the bank
A company has capital of 5 million ordinary shares of £1 each. It pays a dividend of 5% of its profits after tax of £800,000 on sales of £8 million. The market price of the shares is £2.50. What
If you wished to assess the efficiency of a company, which of these ratios would you use:(a) Inventory turnover(b) Interest cover(c) Return on capital employed(d) Acid test ratio(e) Dividend yield?
Study the following financial statements for two very similar privately owned department stores that each have one store in the city centre of the same large city and then answer the questions which
Study the following financial statements of two companies and then answer the questions which follow. Both companies are stores selling carpets and other floor coverings; each company has a single
The directors of L Ltd appointed a new sales manager towards the end of 2015. This manager devised a plan to increase revenue and profit by means of a reduction in selling price and extended credit
What effect would these types of differences have on the ratios of the two businesses?
Adrian Frampton was considering the purchase of one of two businesses. However, Frampton had only been provided with limited information about the businesses, as follows:Additional information:1
What two key things does an inward-looking analysis of this type NOT tell you?
Limedrop plc had the following selected transactions during the past year:1. Sold (issued) 3,600 ordinary shares at £10 par for £35 per share.2. Received £270,000 from various trade debtors.3.
The following information has been extracted from the draft financial information of V Ltd:Dividend paid = £52,000(a) You are required to prepare a statement of cash flows for V Ltd for the year
You are presented with the following forecast information relating to Baker Limited for the nine months to 30 September 2017.Forecast statements of profit or loss (abridged) for the three quarters
The accountant of a private company has been able to get the use of a computer to produce the spreadsheets shown below but as yet the computer lacks a program to print out final accounts. The
List the three headings in the statement of cash flows, as required by IAS 7.
Give an example of the information to be included under each of the headings in an IAS 7-based statement of cash flows and indicate why this information might be useful.
Prepare a statement of cash flows for Chipsea Ltd for the year ended 31 December 2017 as required under IAS 7 using the direct method. The statement of profit or loss, statement of financial position
The statements of financial position and additional information relating to Pennylane Ltd are given below. Prepare a statement of cash flows for Pennylane Ltd for the year ending 31 December 2016 as
The following information has been extracted from the books of Hayes Limited for the year to 31 December 2016:Additional information:1 The directors are extremely concerned about the large bank
The following summarised statements of financial position relate to Track Limited:Additional information:1 During the year to 30 June 2018, some non-current assets originally costing £25,000 had
The Club Ltd was incorporated on 15 May 2017 and took over the business of Poker Ltd on 1 June 2017. It was agreed that all profits made from 1 June should belong to The Club Ltd and that the vendors
Frank Jon Ltd has just finished its second year of trading to 31 December 2017. Balances from Question 8.1 need to be brought forward into this question. Tax rates are the same as for 2016.Data From
The following trial balance of X Limited, a non-listed company, has been extracted from the books after the preparation of the statement of profit or loss and statement of changes in equity for the
The following information has been extracted from the books of account of Billinge plc as at 30 June 2016:Additional information:1 The company was incorporated in 2010.2 The inventory at 30 June 2016
Cosnett Ltd is a company principally involved in the manufacture of aluminium accessories for camping enthusiasts. Its trial balance at 30 September 2018 was:You are provided with the following
The following trial balance has been extracted from the books of Arran plc as at 31 March 2017:Additional information:1 Inventory at 31 March 2017 was valued at £150,000.2 Depreciation for the year
The following trial balance has been extracted from the books of account of Greet plc as at 31 March 2018:Additional information:1 Inventory at 31 March 2018 was valued at £150,000.2 The following
The accountant of Scampion plc, a retailing company listed on the London Stock Exchange, has produced the following draft financial statements for the company for the year to 31 May 2016.You discover
The following scenarios each contain a different share redemption situation.Prepare the appropriate journal entries and explain what you have done in each case:Scenario 1A company redeemed its
Exercises (a) to (e) are based on the following statement of financial position.Note also that exercises (a) to (e) are independent of each other. They are not cumulative.Required:(a) A Rooney Ltd
Exercises (a) to (e) are based on the following statement of financial position.Note also that each of exercises (a) to (e) is independent of any other. The exercises are not cumulative.Required:(a)
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