Questions and Answers of Financial Accounting Theory

Which of the following is the best explanation of why depreciation is added back to operating profit while calculating the cash flow from operations?(a) Depreciation is a subjective amount in the
Which of the following is a correct statement?(a) An increase in inventory (stock) will cause a positive cash flow.(b) An increase in receivables (debtors) will cause a positive cash flow.(c) An
During an accounting period, a business sells goods on credit for a total selling price of £6,000. At the start of the accounting period, there are trade receivables (debtors) of £900. At the end
During an accounting period, a business buys goods on credit for a total price of £5,000. At the start of the accounting period, there are trade payables (creditors) of £400. At the end of the
During an accounting period, a business purchases goods on credit for a total purchase price of £4,000. At the start of the accounting period, there are trade payables (creditors) of £800. At the
What is the cash flow for the month of September?(a) £7,000(b) £13,000(c) £14,000(d) £20,000 The following information relates to questions. On 1 September, a business starts selling goods on
What is the profit for the month of September?(a) £7,000(b) £13,000(c) £14,000(d) £20,000The following information relates to questions. On 1 September, a business starts selling goods on credit
What is the cash flow for the month of July?(a) £3,000(b) £6,000(c) £9,000(d) £13,000 The following information relates to question. On 1 July, a business starts selling goods on credit for the
What is the profit for the month of July?(a) £1,000(b) £6,000(c) £13,000(d) £21,000
The reported net profit of a company for the year is £32m after charging depreciation of £6m. During the year, there was an increase of £4m in inventory (stock). Trade receivables (debtors)
During an accounting period, a business sells goods on credit for a total selling price of £3,000. At the start of the accounting period, there are trade receivables (debtors) of £400. At the end
The reported net profit of a company for the year is £20m after charging depreciation of £5m. During the year, there was an increase of £6m in stocks. Trade debtors and trade creditors remained
During an accounting period, a business sells goods on credit for a total selling price of £4,000. At the start of the accounting period, there are debtors of £600. At the end of the accounting
The reported net profit of a company for the year is £26m after charging depreciation of £3m. During the year, there was a decrease of £6m in stocks. Trade debtors and trade creditors remained
The reported net profit of a company for the year is £35m after charging depreciation of £4m. During the year, there was a decrease of £6m in stocks. Trade debtors decreased by £5m. Trade
You are the fund manager in charge of the investment portfolios of wealthy private clients. One of them has asked you to explain the statement of cash flows that appears in the annual report of a
Most companies use the indirect method of preparing a cash flow statement. You are invited to meet a finance director of a leading listed company which uses the indirect method. Suggest two arguments
Look back to Figure 9.1 in Chapter 9, which shows the working capital cycle. Which activities speed up cash flow from working capital, and which activities slow down the cash flow? Which activities
Compare Table 15.7 with Table 15.8. Which parts of these tables are similar? Which are different? Which table provides more help in understanding working capital changes? Which table shows most
The following information has been extracted from the financial statements of Casings Ltd.Additional informationDuring the year to 31 December Year 2, Casings Ltd sold some non-current (fixed) assets
Everyone likes a bargain, particularly investors. Hennes & Mauritz, Sweden’s purveyor of Scandi fashions worldwide, offers value on the high street. Unfortunately, fears of “peak Scandi” have
Explain why users require all the information contained in Figure 7.1 of Chapter 7 and not merely the primary financial statements with notes to the accounts.Figure 7.1 Primary financial statements
Which components of Figure 7.1 of the text book are currently covered by an audit report of the type illustrated? Discuss the problems and potential benefits of having an audit opinion covering all
Explain how each of the following sections of the annual report is useful to the financial analyst• Statement of financial position (balance sheet)• Income statement (profit and loss account)•
Define a subsidiary company and explain the key elements of the definition.
You are a consultant who has been invited to explain to the board of directors of a company how the company may best use the annual report as a means of communication with shareholders and other
Write a short essay (500 words) listing the advantages and disadvantages of having the same accounting rules in all countries.
Domino’s Pizza International Franchising Inc. (‘DPIF’) is the owner of the Domino’s brand across the globe. We have two Master Franchise Agreements in place with DPIF, which gives us
List three questions that users might ask about depreciation of tangible fixed assets.
Explain why non-current investments are not depreciated.
If the straight-line method of depreciation is used, what is the annual depreciation charge?(a) £2,800(b) £3,400(c) £4,000(d) £4,600The following information applies to question.JK Builders Co
If the straight-line method of depreciation is used, what is the net book value of the excavator at the end of four years?(a) £13,600(b) £24,000(c) £26,400(d) £29,800The following information
If the reducing-balance method of depreciation is used, applying an annual depreciation rate of 15 per cent, what is the annual depreciation charge in Year 2?(a) £3,400(b) £4,335(c) £5,100(d)
If the reducing-balance method of depreciation is used, at a rate of 15 per cent per annum, what is the net book value of the excavator at the end of 3 years?(a) £15,435(b) £19,120(c) £20,880(d)
The accounting purpose of depreciation is that it:(i) produces cash for non-current (fixed) asset replacements(ii) is an allocation of the cost of non-current (fixed) assets over their period of
How much of this expenditure will be regarded as an expense in the income statement (profit and loss account)?(a) £100,000(b) £400,000(c) £500,000(d) £900,000 The following information applies
What is the cost of the land in the company’s statement of financial position (balance sheet)?(a) £1.5m(b) £1.6m(c) £2.0m(d) £2.1mThe following information applies to question.A major
Which of the following statements is/are correct?(i) An increase in the estimated useful life of a non-current (fixed) asset reduces the annual depreciation charge.(ii) A reduction in the estimated
Which of the following phrases best describes the purpose of the annual charge for depreciation within the historic cost accounting method?(a) To allocate the cost of an asset over its useful life(b)
On reviewing the financial statements, the finance director discovers that the cost of sales includes £30,000 with respect to the development expenditure that is expected to benefit future years. It
The following is a list of non-current (fixed) assets:(i) Plant and equipment(ii) Patents(iii) Shares in subsidiary companies(iv) Trade marks Which of the above are classed as intangible assets?(a)
During the past 12 months, Brown Ltd has undertaken major work on its warehouse facilities. In the course of this work, the following expenditure has been incurred:What is the split of expenditure
What information is likely to appear on the face of the statement of financial position (balance sheet) of this company?(a) Cost and depreciation figures at the end of Year 2 for each category of
Which of the following statements is/are likely to be correct?(i) Land and buildings have a shorter useful life than plant and equipment.(ii) Purchases of non-current (fixed) assets are greater than
What is the net book value of land and buildings at the end of Year 1 and Year 2?(a) Year 1 £131m; Year 2 £51m(b) Year 1 £131m; Year 2 £137m(c) Year 1 £80m; Year 2 £90m(d) Year 1 £84m; Year 2
What is the average useful life of plant and equipment?(a) 13.7 years(b) 7.3 years(c) 1.9 years(d) 10.9 yearsThe following information is relevant for question.Tangible non-current (fixed) asset
What is the average age of plant and equipment?(a) 2.0 years(b) 12.8 years(c) 7.4 years(d) 10.9 yearsThe following information is relevant for question.Tangible non-current (fixed) asset information
In calculations of depreciation, which of the following factors is known with greatest certainty?(a) Residual value(b) Useful life of asset(c) The accuracy of the depreciation method in reflecting
Find a website of a major listed company and follow the ‘investor relations’ link to find the annual report. Find the information about non-current (fixed) assets and depreciation. (Start with
The Machine Grinding Company commenced business on 1 January Year 1 with capital of £80,000 contributed by the owner. The company immediately paid cash for a grinding machine costing £80,000. It
The Machine Grinding Company sold the machine for £40,000 at the start of Year 4 and replaced it with a new machine costing £100,000. The new machine had an estimated useful life of 8 years and an
A food processing company purchased, on 1 January Year 1, a canning machine. The machine costs £24,000 and was estimated to have a 5-year life with a residual value of £2,000.Required:(a) Prepare a
Why investment by UK companies continues to fallBrexit uncertainty is driving cuts in transport and machinery spending, say experts Gavin Jackson in London January 8, 2019 Investment by UK companies
What wording would you expect to find in an accounting policy note on inventories?
Which of the following would be included in a statement of financial position (balance sheet) under the heading ‘inventory’ (‘stock’)?(i) Raw materials(ii) Bank deposits(iii) Finished
Which of the following events results in an increase in working capital?(a) The sale of finished goods to customers on credit terms(b) The acquisition of raw materials on credit(c) The transfer of
What is the amount of purchases during Year 2?(a) £2,500(b) £4,740(c) £5,500(d) £7,240The following information applies to question.On 31 December Year 1, James White and Co carried out its
What is the total cost to be allocated between closing inventory (stock) and cost of sales?(a) £2,240(b) £4,759(c) £7,240(d) £9,940The following information applies to question.On 31 December
If the first-in, first-out (FIFO) method of inventory (stock) valuation is used, what is the amount of closing inventory (stock)?(a) £1,740(b) £1,750(c) £2,500(d) £5,500The following information
If the first-in, first-out (FIFO) method of inventory (stock) valuation is used, what is the amount of cost of sales?(a) £1,740(b) £2,500(c) £5,500(d) £7,240The following information applies to
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

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