Questions and Answers of Accounting Principles

Kim has prepared the information in Table 9.1 so that Sam can consider whether to obtain external funding by issuing ordinary shares or by issuing debt. He has prepared alternative statements of
Sam Smart has been very busy running his business Smart Sports for the last few years. Sam’s cousin Dan, who lives in Australia, has been playing the lottery for the last five years and has
Sam and Kim begin to draw up the cash budget for the first three months of trad- ing. Sam plans to call the business Smart Sports and he will invest his savings of 10,000 to get it started. His
Who might be particularly interested in each of the following types of ratio:° Profitability° Liquidity° Efficiency?
Shown in Tables 8.1 and 8.2 are the summarized income statements for the two Indian shops for the year ended 31 December 2014, plus the summarized total capital employed as at 31 December
The ratios in Table 8.4 have been computed for a manufacturing business and a supermarket.Discuss why it is possible for these two companies to operate successfully with such different liquidity
Smart Sports Ltd has been approached by Running Fast Ltd, who run a small chain of sports stores in the London area, to supply them on a monthly basis with team kits.The business has had a number of
What non-financial factors might you consider when deciding whether or not to invest in a business?
Why do investors pay more for a business than the statement of financial position value of the net assets?
Can investors rely on the accounting information given to them?
How can an investor explore the economic/market context in which the business operates?
Dee Ltd manufactures sweets and chocolates. Extracts from Dee Ltd's statement of financial position as at 30 September 2013 is given in Table 9.7.REQUIRED:a) Explain what you understand by the term
Joisa plc is a business that specializes in the manufacturing of designer luggage.A luxury goods company Luxy Goods plc is considering buying Joisa plc so that they can expand their luxury goods
Rory’s Newsmart owns and runs four stationery shops in Edinburgh, supplying retail and trade customers. Rory, who is the managing director of the company, has asked for your help. He is very
A few years ago Sarah started a business making cookies, cakes, and biscuits and supplying them to coffee shops and cafés. The business has always been profitable, and during 2011 it diversified
When Danni first started trading, he sold 2,000 cans of drinks in January, the first month. The drinks cost him €2 each, and he sold them for €3 each. During that month, he bought 2,400 cans and
Decide whether each of the following would be classified as an operating cash flow, an investing cash flow, or a financing cash flow:a) Proceeds of a share issue.b) Purchase of property.c) Purchase
Smart Sports Ltd’s income statement for the year ended 31 December 2013 showed a profit for the year of £30,902. During that year, the company purchased new premises at a cost of £80,000, along
By referring to the statement of cash flows in Table 7.4, answer the following questions:a) Explain why the business has an overdraft at 31 December 2013 despite all its fundraising activities and
In January 2014, Raja invested £30,000 in Smart Sports Ltd by buying 20,000 shares in the business. In the same month, he set-up shops in Mumbai and Delhi and started trading, having appointed
Using the statement of cash flows you prepared in Demonstration Exercise 7.5, and the ‘What to look for’ questions listed in the previous section, interpret Smart Sports Ltd’s statement of cash
Would you expect the gross profit margin to be high or low for a luxury-products business?
Will a business that operates with a high gross profit margin necessarily achieve a high operating profit margin and a high return on capital employed?
If the current and acid test ratios fall sharply, does this necessarily mean that the business is experiencing liquidity problems?
What could happen if a company does not control its trade receivable days?
What is Just In-Time inventory control?
The following ratios were computed for TC Ltd based on the company’s 2013 and 2012 accounts:REQUIRED:Explain which of the following statements are true and which are false:a) On average, TC Ltd's
Summarized in Table 8.7 is some data extracted from the accounts of three companies, all of which are in the wholesale dog food business:REQUIRED:a) Calculate the following ratios for all three
A sole trader's statement of financial position shows the amount of capital that the owner has invested in the business. What is the equivalent figure or figures for a company?
A sole trader can take drawings from a business. How would someone who is a director and shareholder of a business be rewarded?
What are the implications for a company if some of its shareholders sell their shares at a profit? Will the share premium account be affected?
Adiga Ltd is a company that has issued ordinary £1 shares and 7% £1 preference shares. The company’s trial balance as at 31 December 2012, after the income statement has been prepared, is shown
The trial balance in Table 6.14 was prepared for Sacha SA, a French winemaker, after the income statement for the year ended 31 March 2013 had been drawn up.REQUIRED:a) The directors are keen for the
Casey, one ofy our friends, has recently inherited a small shareholding in an Irish company, Meditor Ltd, which manufactures diagnostic medical equipment. Casey knows very little about the company
Balances extracted from the books of Smart Sports Ltd after it has been Trading for one year are given in Table 6.2.Using the information given above for Smart Sports Ltd:a) Complete the pro-forma
Danni’s Drinks GmbH issues 10,000 €1 ordinary shares at €1.40 per share.Required:a) How much cash will be raised from this share issue?b) By how much will the ordinary share capital increase
The trial balance of Smart Sports Ltd as at 31 December 2012 is given in Table 6.8.Remember that you have prepared the income statement and statement of changes in equity in Demonstration Exercise
One of the suppliers whose accounts Sam had been reading included the accounts of Zippy Shirts SA, a company based in France. Extracts from the company’s financial statements as at 30 June 2012 and
How is it possible for a profitable business to experience cash flow problems?
Why is working capital management key to managing cash in a business?
If a business generates significant cash flows from operations, is it always advisable to raise extra long-term funding (by issuing shares and/or loans) if the business wants to expand?
If a business found that there was a surplus on revaluing a property, what effect would this have on its cash position?
Statements of cash flow are prepared after the end of an accounting period. What technique could a business use to plan future cash movements and balances?
Danni, the drinks seller, buys a fridge costing €630 that is expected to be used by the business for three years, at the end of which time it is estimated that it will be worth approximately €30,
Smart Sports purchased a printing machine for £5,500, and having done some research, Sam estimates that it should have a useful life of four years, at the end of which time it is likely to have no
Smart Sports purchased a computer for £3,500. Kim advises Sam to depreciate it on the reducing-balance basis at the rate of 40% per annum.a) Complete the working in Table 4.4 to find the
The trial balance for Smart Sports is given in Table 4.7, along with additional information in the table footnotes that will enable the final version of the income statement and statement of
Shareholders in companies are protected by limited liability, which is a long-standing principle Why do you think shareholders are given the benefit of this protection?
Ordinary shares are issued by all companies, and preference shares are issued more rarely. Who might be interested in buying preference shares in a company?
Given that companies issuing loans and debentures will be obliged to meet interest payments when they fall due, why do companies not just issue share capital only and avoid this obligation?
If a company has retained profits over a number of years, does this mean that the company must have large cash balances as a result?
Chris Monk is planning to form a company, Monk Ltd, and needs to raise a total of £1,000,000. He is considering various ways of raising this sum:Option 1 Issue 70,000 £10 ordinary shares at nominal
Jorge is planning to set-up a restaurant business called Herring, serving Scandinavianstyle fast food. He has plans to start by opening one restaurant and then within months to open at least two
a) What might be the main benefits to Sam of forming a company?b) Would you expect Smart Sports to be formed as a private or public company, and how will this affect the company name?c) IfSam cannot
Sam has decided that he will form a company, Smart Sports Ltd, and aims to raise £50,000 from the issue of ordinary shares.a) Would you recommend that the company issue 50,000 shares of £1 nominal
Sam is interested in making contact with venture capitalists to see whether Smart Sports is a business in which they might be prepared to invest in the futurea) What might be the main benefits to
Sam has now decided to form his company, Smart Sports Ltd, and to issue 50,000 £1 ordinary shares at £1 per share. In addition, the company will take out a fiveyear loan for £18,000 from Green
Danni runs a business selling soft drinks from a van that trades outside sporting events and concerts. Which of the following would be assets of Danni’s Drinks business?a) The fridges bought by
Sam has prepared his income statement for the year ended 31 December 2011, and the balances shown in Table 3.2 remain on his trial balance.Note that, because the trial balance in Table 3.2 has been
Smart Sports has paid electricity bills totalling £1,920 during its first year of trading, which is the amount on the trial balance. However, this amount covers only electricity used up to 31
Smart Sports has paid insurance premiums totalling £1,750 during its first year of trading, which is the amount on the trial balance at the year-end, 31 December 2011. However, this amount provides
The trial balance for Smart Sports is given in Table 3.4:1. Betty’s loan to the business was interest-free for the first six months of the year, after which time interest was to be paid at the rate
Does the statement of financial position include every significant asset from which the business benefits?
Would it be easy to value these assets in order to include them on the statement of financial position?
Will all businesses use the same depreciation methods and rates for similar assets?
Property is included as a non-current asset on the statement of financial position at cost less accumulated depreciation, is this likely to be the most relevant value for all users of the accounts?
The provision for doubtful debts is based on a percentage of trade receivables at the year-end, a percentage which varies from business to business Why is there no common percentage for all
Does the prudence concept mean that accountants always take a very pessimistic approach towards arriving at the profit for the year?
Douggen manufactures and installs specialist industrial pumps. The business commenced trading on 1 January 2012 and purchased the following assets: Plant and machinery £80,000 Motor vehicles
The trial balance of Russells as at 31 December 2012 is shown in Table 4.10.*No depreciation is to be charged on freehold premises.*All depreciation is to be provided on the straight-line basis.
Poppy started a business on 1 July 2011 as a personal fitness instructor and put in €8,000 capital to fund it. She prepared her first year’s accounts to 30 June 2012.During her first year, she
Jo recently set-up as a satay man along Bukit Timah Road in Singapore providing satay at parties. Jo bought-in 1,700 chicken satays at 50 cents per satay and had 700 satays at the end of the month.
Sophie Sophie has a hairdressing business and has produced the trial balance in Table 2.6.REQUIRED:Categorize each of the items in Sophie's trial balance into one oft he following types:* income *
Helga's trial balance, drawn up at the end of the first year of trading, is shown in Table 2.7.REQUIRED:a) Identify the entries in Helga's trial balance that represent revenue income and revenue
A friend of Sam, Danni, sells canned drinks from a van in the centre of Berlin each night. Danni sold 500 drinks during one week. Each drink sold for €3, and each one cost Danni €2 to make. 1.
If one of Danni’s customers, who bought drinks worth €30 during January, was allowed not to pay immediately but was given one month’s credit, then:1. What would be the effect on Danni’s
Consider the Smart Sports business, and for each type of account listed above write down at least one example of an item that might be included under that heading.
Table 2.3 shows the payments that Smart Sports made during the year ended 31 December 2011. Categorize each payment into capital or revenue expenses.The first two have been completed. Table 2.3
Danni sells drinks cans from his van in Berlin. On Monday he started the day with 30 cans in his fridge. He bought 50 more cans during the day, and he finished the day with 20 cans.1. How many cans
The revenue income and expenditure for Smart Sports is given in Table 2.4. From this information, prepare the income statement (Table 2.5) for the year ended 31 December 2011. Table 2.4 Revenue
In addition to the statement of financial position, what other documents might a bank ask to see to determine whether to lend money to a business?
How might someone preparing accounts know whether the business has accruals and prepayments at the year-end?
Will the amount of an accrual always be an exact known amount, or could it be an estimate?
If a statement of financial position balances, does this confirm that it is correct?
The trial balance in Table 3.7 was extracted from the records of Nick's Office Supplies as at 31 December 2011.Additional information as at 31 December 2011:1. The loan carries interest at 10%, and
Ming has been running a market stall in Beijing for some years. The stall sells hats and fans to holidaymakers. Ming works on the stall for three days a week and employs her younger sister to run the
Sam sets about planning the cash receipts and payments for the next three months, taking into account the different timings that will arise from sales and purchases being made on credit.a) Sam
a) Calculate the gross profit margin on each of the football kits that Sam plans to sell between January and March 2011.b) Calculate the overall gross profit margin that would be made on the three
During the first six months of the business, Sam is confident of making a large sale each month to a football or hockey club with whom he has already been negotiating. From then on, Sam hopes that
What assumptions have to be made to prepare a cash budget? Will they be based on judgements or facts?
What risks might affect the accuracy of these numbers?
What are the consequences if these judgements and assumptions turn out to be unrealistic?
Where might a business find additional funding if needed?
Maris is preparing a cash budget for her new business. She expects her sales for the first six months to be:Maris expects that 25% of the sales will be paid for immediately, while 50% will be paid
Sue runs a business called Oxford Cycles, selling fold-up bicycles. She set this up in 2010 and is now looking to expand by taking on two extra members of staff to help meet a recent sharp increase
If a business makes a profit in its first year of trading, can you be sure that it will have a positive bank balance at the year-end?
If a business bought a large quantity of extra inventory just before the year-end and planned to sell it at a later date, what effect would this have on the profit for the year?
Do you think that it is always straightforward to distinguish capital expenditure from revenue expenditure?
Why are drawings taken out by the owner not treated like employees' wages, which are shown as expenses in the income statement?
Rena Jacques and George Nadler are partners in a paint and decorating store. The store operates on a yearly fiscal period. At the end of each year, an accountant is hired to prepare financial

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