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Accounting Understanding And Practice 4th Edition Robert Perks - Solutions
What are the characteristics of data required to generate knowledge about corporate eco-efficiency?
Who are the main users of financial accounting information, and what are their information needs?
Define assets and liabilities.
Why are ‘provisions’ a problem?
Why do we not have ‘pure’ historic cost accounting?
Distinguish between ‘revenues’, ‘income’ and ‘gains’.
Why is ‘profit’ seen as being important?
What is ‘profit’?
Explain the meaning of ‘relevance’ and ‘reliability’ in financial reporting.
Examine the main methods of measuring (or valuing) assets.
Define revenues and expenses. What other sorts of gain are there?
What are the tests for recognizing an intangible asset?
Is profit usually overstated when historic cost accounting is used?Explain.
To what extent is it possible for published financial statements to meet the needs of different user groups?
Does financial accounting have any fundamental accounting concepts? Is it more helpful to establish objectives and constraints?
Financial statements are part of the process of making the directors of companies accountable to their shareholders. How accountable do you think they really are?
Examine the idea of accountability in relation to an organization with which you are familiar (e.g. a university, a church, a football club, a national government).
Why is it not easy to define and measure profit?
Describe how to calculate:a current ratio;b quick ratio;c capital gearing ratio;d interest cover.
Why are inventories excluded from current assets when calculating the quick ratio?
How is the return on ordinary shareholders’ capital employed calculated?
If debentures are included as part of capital employed, what figure is used for ‘return’? How and why does it differ from the ‘return’ figure used for calculating return on ordinary shareholders’ capital employed?
If a company’s gross profit ratio has increased, what does that tell us about the volume of sales and selling prices?
You are given the following statement of financial position information about the Nikkigra Company.You are required to comment on the financial position and performance of the company, making use of appropriate ratios.
Why would you expect retailers to have lower current ratios than manufacturers?
What information (in addition to the current ratio, quick ratio, capital gearing ratio and interest times cover) would you want to assess a company’s solvency?
Accounting ratios are said to be most useful when making comparisons. If you had a set of ratios for a company, what comparisons would you make?
What are the main limitations of accounting ratios?
How could a company increase its profitability when sales are falling (assuming that it is unable to increase sales)?
You are given the following statement of financial position information about Jackdan Ltd. You are required to comment on the financial position and performance of the company, making use of appropriate ratios. Statement of financial position of Jackdan Ltd as at 31 December Assets Non-current
Which is more important: increasing ROCE, or increasing earnings per share, and why? Can a company increase its earnings per share year after year, although its ROCE is steadily falling?
In what circumstances can a substantial improvement in a company’s position result in a reduction in their ROCE?
In what circumstances can a steady increase in a company’s ROCE be a symptom of a company being in decline?
Many companies’ profitability is lower than it should be because they have too much money tied up in assets. They should aim to have a zero level of assets. This would lead to a ROCE of infinity.Discuss the practicability of these suggestions.
Most efforts to reduce the amount of funds tied up in assets are wasted because one type of asset is turned into another: inventories and surplus buildings become receivables and cash. The total capital employed, and the total profitability is unaffected. Discuss the validity of these statements.
The Executive Service Company has high levels of inventory, and impressive premises; their sales/net assets ratio is 1 : 1. The QuickValue Service Company has low levels of inventory, and backstreet premises; their sales/net assets ratio is 2 : 1. Does that mean that the QuickValue Service
Explain the meaning, calculation and significance of each of the following:a P/E ratio;b dividend yield;c dividend times cover.
Is a company’s statement of financial position value (net asset value) likely to be higher or lower than its market value? Explain.
If a company currently has a dividend yield of 10 per cent, does that mean that someone investing £100 today will receive £10 dividend in the coming year? Explain.
You are given the following information about two companies. You are required to fill in the missing items for Beermouth plc. Alemouth plc Beermouth plc share capital (20p shares) 1,600,000 2,000,000 Retained earnings 3,200,000 18,000,000 4,800,000 20,000,000 Net profit after tax for year 3,520,000
Comment on the dividend yield of Alemouth plc.
Comment on the relationship between the net assets per share of Beermouth plc and its share price (or on the relationship of the total of shareholders’ funds to the market capitalization).
What is the level of the FTSE 100 today? What is the average P/E ratio of the top 100 companies? What is their dividend yield and dividend cover? You are given the following information about the FTSE 100:What do you think are the main causes of the changes a between September 2003 and June 2006?b
You are given the following information about two companies, partly extracted from their most recent statement of financial position and income statement, and partly taken from the financial press. You are required to fill in the missing items for Drinkmouth plc. Share capital (20p shares) Retained
You are given the following information about Swin Gin plc:You are required to calculate the P/E ratio for each year, and comment on how the market appears to have reacted to changes in EPS. Year 1 Year 2 Year 3 Year 4 Year 5* Year 6 Year 7 EPS 0.50 0.55 0.62 0.01 1.20 0.83 0.90 Share price 6.00
Assess the usefulness of P/E ratios and suggest how they might be misleading.
Select a recent takeover bid (e.g. Kraft and Cadbury). Assess the various factors that determined the price that was eventually agreed for the company which was taken over.
Look at the shares listing in the Financial Times. What is an average P/E ratio? Select some companies with high P/E ratios. Do they seem to have anything in common? How useful are the P/E ratios given for different sectors in the ‘FTSE Actuaries Share Indices’? Select some companies with low
Look at the shares listing in the Financial Times. What is an average dividend yield? Select some companies with high dividend yields. Do they seem to have anything in common? How useful are the dividend yields given for different sectors in the ‘FTSE Actuaries Share Indices’? Select some
Each member of the group selects one or two companies in which they believe the shares are likely to increase in price during a selected period. A long period may be preferable, but in a 10-week module the selection could be made in week 3; the shares monitored for 6 weeks; and the ‘final’
Each group forms one or more hypotheses about how to select companies where the increase in share prices is expected to be higher than the average for the FTSE 100 companies. Examples might include (with variations) such things as:a companies with a dividend yield of between 4 per cent and 5 per
Each group chooses three different sectors (e.g. pharmaceuticals and biotech; construction and materials; travel and leisure and retailers). The key stock market indicators are found for each sector and compared with the average for the FTSE. These are shown in the Financial Times as ‘FTSE
Which of the following are shown on a statement of financial position: assets; expenses; liabilities; sales; share capital; profit for the year?
What is the difference between a non-current asset and a current asset?
Give examples of non-current (or ‘fixed’) assets. In what circumstances would some of the items you have listed be current assets?
Arrange the three main statement of financial position items (assets, liabilities, equity) as an equation.
A statement of financial position appears to show what a business is worth. What are the main problems with this statement?
You are given the following simplified statement of financial position of the Sandin Castle Company:a Calculate the current ratio.b Calculate the liquidity ratio.c After preparing the statement of financial position, the company sells inventories, which had cost £4,000, for £8,000, which it
You are given the following simplified statements of financial position of the Windysand Company as at 31 December:a How much profit does it at first seem that the company made during year 2?b How would your answer to (a) be affected if you found out that the company had paid £10,000 in dividends;
You are given the following simplified statements of financial position of two very similar companies, Domer Castle Company and Warmer Castle Company as at 31 December year 1.During year 1 the operating profit (earnings before interest and taxation) of the Domer Castle Company amounted to £31,000.
You are given the following simplified statement of financial position of the Stonefolk Company as at 31 March year 4.a The following transactions took place in April year 4. Show how each would affect the statement of financial position. (Each transaction must affect two or more figures, and the
What are the main functions of a statement of financial position?
You are given the following simplified statement of financial position of the Hackin Company as at 30 June year 9.a Calculate the company’s current ratio and liquidity ratio.b The following transactions take place during July year 9:i New plant and equipment are bought for £80,000, and payment
You are given the following simplified statements of financial position of the Fourpine Company as at 31 December.a How much profit does it at first seem that the company made during year 2?b How would your answer to (a) be affected if you found out that the company had paid £25,000 in dividends?
You are given the following simplified statements of financial position of the Port Andrew Company and the Port Edward Company as at 31 December year 1.During year 1 the operating profit of the Port Andrew Company amounted to £61,000. The operating profit of the Port Edward Company amounted to
You are given the following simplified statement of financial position of the Whiting Company as at 31 August year 6:a The following transactions took place in September year 6.Show how each would affect the statement of financial position.(Each transaction must affect two figures, and the
‘How much am I worth?’ There is no need to disclose actual figures or personal information. The objective is to determine – and for members of the group to agree – the way in which the question would be answered. What principles or rules would you use?
Each member of the group should choose two listed companies, and obtain their published statement of financial position (from the companies’ websites or by using the Financial Times Annual Reports Service). Try to assess how financially strong each company is (or is it likely to collapse?). The
Is it possible to calculate the value of a company? If not, why not?If so, how?
Which of the following should be included as assets on a company’s statement of financial position: money that is owed to the company; the cost of an advertising campaign; machinery that is over 20 years old but which is still used occasionally; key employees who have a high market value; money
What are the main differences between a statement of financial position and an income statement?
What is an expense? How does an expense differ from an asset? Can an asset become an expense? In what sense could it be argued that an asset is an expense waiting to happen?
How are inventories valued? Why does it matter? Would it be a good idea to show inventories at selling price?
Why is depreciation charged?
What is the difference between capital expenditure and revenue expenditure?
Which of the profit figures shown in a simplified income statement(Illustration 2.2) are shareholders likely to be most interested in, and why?
The Kingsdun Company buys a delivery van for £25,000 and a boring machine for £25,000. They decide that the delivery van should be depreciated at 25 per cent per annum on a diminishing balance basis, and that the boring machine should be depreciated at 10 per cent per annum on a straight-line
The Dargate Retailing Company sells a range of different products, some with modest gross profit margins, and some with much higher gross profit margins. For example, they buy Fargs for £100 each, apply a 25 per cent mark-up, and sell them for £125 each; the gross profit on Fargs is, therefore,
Banterbury Company LtdThe chairman of the company boasts that sales, profits and dividends are at record levels and that the amount of shareholders’funds in the business has increased to £109,000 at the end of year 4.Critically assess the performance of the company. Income statement of the
The Broadstores Company:The chairman of the company states that the management of the company has performed well in a very difficult economic climate, and that increased profits have been retained within the business to finance profitable expansion.A shareholder at the annual general meeting of the
The Billygate Company operates with a 40 per cent mark-up on the goods that it buys. What is its gross profit ratio?The Sillygate Company operates with a 40 per cent gross profit margin. What percentage mark-up does it use?
Roger, a graduate of the University of South East England, has been running a business called ‘SuperSoftService’ since he completed his information technology (IT) degree six years ago.He sells software and prides himself on providing fast delivery using his sports car, and he has an extensive
The Depreciation Company The directors of the Depreciation Company are deciding on their accounting policy on the depreciation of their non-current assets.They have just purchased some new assets that cost £200,000 and which they expect to sell after five years for £20,000.a Calculate the
The Chinese Motor Company The Chinese Motor Company runs a UK branch and a China branch. Both branches run three departments for sales, car servicing and the sale of parts.Advise the management of the company a why the users of the company’s financial statements would find a segmental report
Profit figures are wanted by so many different groups of people for so many different purposes that it is not possible to define and measure profits in such a way as to meet all of those different needs.Discuss.
Attempt a definition of ‘profit’. You can use other books. Can all members of the group agree on the definition? Is the definition clear and robust enough to provide a basis for measuring profits in all businesses? You could have a formal debate with two people arguing in favour of a particular
Last year a company’s statement of financial position showed freehold land and buildings at cost, the amount being £4m. This year the properties have been revalued at £7m. Is the company £3m better off? Have they made £3m profit?
Why do companies aim to earn profits? Should all organizations attempt to earn profits? If you think that some organizations should not attempt to earn profits, on what basis would you decide which should earn profits, and which should not?
Do companies have too much freedom to determine the methods and rates of depreciation that they use for their published accounts?Where governments specify methods and rates of depreciation to be used to calculate profits for taxation purposes, should companies be required to use those same rates in
You are a shareholder in a listed company and are told that last year the company’s net profit after tax increased from £100m to £130m, and that the management of the company is therefore performing extremely well.a What additional information would you want in order to assess the effectiveness
Examine Marks and Spencer Group’s results since 2010. Has the expansion of the company been successful in leading to a big enough increase in profits?
Compare the gross profit ratios of a number of different retailers.Are the differences very substantial? How do you explain or justify such differences?
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