Questions and Answers of Financial Accounting Theory

Which of the following most accurately describes an item of ‘Deferred Income’?(a) Income reported in the income statement (profit and loss account) that has not yet been earned.(b) Services
Which is the most accurate description of a ‘Deep discounted bond’?(a) A security issued at a price higher than its repayable amount on which interest is paid at market rates during the period of
What is the impact on the accounting equation while establishing a provision for the estimated cost of a 3-year warranty scheme for goods sold?(a) Increase liabilities: decrease ownership interest
Which of the following statements is/are correct?(i) All debentures are secured on the property of a company.(ii) Debenture holders have a right to receive interest payments each year.(iii)
Which of the following is the most accurate definition of the term ‘a floating charge’?Is it(a) An agreement to buy foreign currency at a fixed future date at an agreed price.(b) A procedure
Imagine you are a shareholder in a company which is financed partly by long-term loans. Write down the information needed by users in the order of importance to you as a shareholder and explain your
David and Leona are discussing four types of long-term liability: deferred tax, warranties, deferred consideration, and provisions for restructuring. From their conversation, why is an investor
Look back to the Real World Case at the start of the chapter. The accounting policies for two types of provision are explained in detail. They can be summarised by reference to the accounting
Consider a grant received as a contribution to staff retraining costs over the next three years. Write down three arguments in favour of reporting the entire grant in the income statement (profit and
BP at a glanceWe are a global energy company with wide reach across the world’s energy system. We have operations in Europe, North and South America, Australasia, Asia and Africa.Extracts from
Peter (Television) Ltd gives a 2-year labour and parts warranty on all television sets that it sells. The company has the following revenue for its first 2 years of trading:Based on the level of
Home Bakeries Ltd receives a training grant to cover staff training costs that will be incurred evenly over the next 2 years. Explain the accounting treatment.
The following information is taken from the annual report of a major listed company. Write a short explanation that is suitable for a private shareholder who does not have specialist accountancy
The following information is taken from the notes of the statement of financial position (balance sheet) of a listed company. Write a short explanation that is suitable for a private shareholder who
Explain why the following item is reported as a contingent liability and not as a provision.‘Under the Value Added Incentive Scheme, which is currently under review by the Board, further amounts
What is the relationship of ‘net assets’ to ‘ownership interest’?
Which of the following items is/are likely to be found in a company’s statement of changes in equity?(i) Dividends paid(ii) Surplus on revaluation of non-current (fixed) assets(iii) Premium on the
Which of the following methods of issuing shares will have no impact on the overall amount of ownership interest in a company’s statement of financial position (balance sheet)?(a) Rights issue(b)
Which of the following items is/are likely to be found in a company’s ‘Statement of changes in equity’?(i) Dividends received(ii) Exchange rate adjustments(iii) Impact of a revaluation of
Which of the following is an accurate statement regarding dividends?(a) A company must declare an ordinary dividend if it makes a profit in an accounting period.(b) The directors of a company have
Which of the following is a correct description of the term ‘share option’?(a) Provides a person with the right to buy shares in a company at a future date at an agreed fixed price.(b) Name given
On reviewing the financial statements, the company’s accountant notices that the capitalization issue of 1 for 5 ordinary shares made by the company in December Year 2 has not been reflected in the
On reviewing the financial statements, the company’s accountant notices that the rights issue of 1 for 3 ordinary shares made by the company in December Year 2 has not been reflected in the
Which of the following items would not appear in the section of the statement of financial position (balance sheet) headed ‘Capital and reserves’?(a) Share premium(b) Preference shares(c)
Which of the following will normally be included in the ‘Capital and reserves’ section of a company’s statement of financial position (balance sheet)?(i) Convertible loan stock(ii) Deferred
City Centre plc has owned a block of offices for many years. The building is recorded in the statement of financial position (balance sheet) at £750,000, the historical cost being £900,000 less
Suppose the block of offices in question B12.7 was to be valued by a professional expert at £640,000. What effect would this information have on the reported financial statements?Data from B12.7City
The Real World Case at the start of this chapter gives an example of a revaluation that has occurred through an increase in infrastructure assets. What might be the infrastructure assets of a water
Suppose you note that a company has revalued its land and buildings as reported in the statement of financial position (balance sheet). What evidence would you expect to see as justification for the
The Real World Case at the start of this chapter explains how the company decides on its dividend policy. What do we learn about the discretion that can be exercised by a company in deciding its
A newspaper reports the announcement of a share repurchase plan in a company which provides engineering services to the aerospace industry. The chief executive officer has said ‘This new share
Thames Water plcThames Water is one of ten regional licensed and regulated companies providing water and wastewater services in England and Wales. With 15 million customers we serve about 25% of the
This exercise tests your understanding of all aspects of accounting learned till the end of Chapter 12 and tests your ability to use an accounting equation spreadsheet for recording the transactions
This exercise tests your understanding of all aspects of accounting learned till the end of Chapter 12 and tests your ability to use an accounting equation spreadsheet for recording the transactions
The following table sets out business transactions and events for Chris Brown LtdRequired:(a) Using the accounting equation spreadsheet provided, record the effect of each transaction and events of
Which of the following is the most accurate definition of return on shareholders’ equity?(a) Profit after tax as a percentage of share capital(b) Profit after tax as a percentage of share capital
What is the formula for calculating the price–earnings ratio?(a) Profit after tax for ordinary shareholders divided by number of ordinary shares(b) Number of ordinary shares divided by profit after
A company has acquired a major new piece of equipment immediately before the yearend.The cost is £100,000, part of which is financed through the issue of £50,000 debentures and the rest by taking
The current ratio is greater than 1:1. What would be the impact on the company’s accounting ratios while buying an extra 3 weeks of goods from suppliers on credit and immediately before the year
The following information is available about two companies, A Ltd and B Ltd.Which of the following statements is correct while making a comparison of company A with company B?(a) Company A has the
The following information is available about two companies, A Ltd and B Ltd.Which of the following statements is correct while making a comparison of company A with company B?(a) Company A has the
The following information is available about two companies, A Ltd and B LtdWhich of the following statements is correct while making a comparison of company A with company B?(a) Company A has the
The following information is available about two companies, A Ltd and B Ltd.Which of the following statements is correct while making a comparison of company A with company B?(a) Company A has the
What is the assumed behaviour of a risk-averse investor?. What view might a risk-averse investor take of the interaction of these two types of risk?
Which side of the pyramid of ratios concentrates on profitability? Which side concentrates on efficiency? How can a business earn a high return on capital employed despite low profit margins?
Z-scores, M-scores and other similar indicators are usually found in private reports from investment advisers to their clients. The newspaper article reproduced in this section points out that the
Calculate ratios for Andrew Hunt plc and evaluate by comparison with the industry average.Dividend proposed for the year is £150,000 or 10 pence per share.The market price of the ordinary shares of
Calculate ratios for Ed’s Enterprises and evaluate by comparison with the ratios calculated for Andrew Hunt plc in B13.3.Data from B13.3Calculate ratios for Andrew Hunt plc and evaluate by
The summarised version of the Year 7 accounts of Worldchem plc is shown below along with comparative figures for the previous year. Most of the notes in the accounts, which give further details about
Prepare a full ratio analysis and commentary for Craigielaw using the form. Assume that a share price of 160 pence is applicable at both year-end dates. Industry average ratios for both Year 7 and
Operating profit marginsThe following extracts show the different ways in which three companies report their operating profit margins (operating profit as a percentage of sales). This ratio is an
Which of the following is a correct statement about the strategic report?(a) A forward-looking aspect is not permitted.(b) A forward-looking aspect is encouraged.(c) The content of the strategic
Which of the following is a correct statement?(a) There is a business directory which defines all segments of all companies.(b) The decision on defining segments for reporting is a matter for the
. Which of the following is an example of off-balance sheet finance?(a) The unconditional sale of a building to an unrelated company.(b) Borrowing on overdraft from a bank.(c) Borrowing secured on
Which of the following statements describes the Global Reporting Initiative?(a) A law that applies throughout Europe requiring international accounting standards to be used.(b) A law that applies
Which of the following describes the Combined Code?(a) A Code of practice for auditors setting the auditing standards to be applied in any company audit.(b) A Code of practice explaining how
Which of the following statements is correct?(a) Directors are responsible for preparing the financial statements of a company to present a true and fair view.(b) A qualified audit report ensures
Which of the following statements is correct?(a) The replacement cost of an asset is normally regarded as a more reliable measure than historical cost.(b) Historical cost is rarely used by companies
How much of the information suggested for the strategic report is extracted directly from the financial statements?How much of the information suggested for the strategic report provides additional
Off-balance sheet finance is one example of information which would never come to the attention of the users of financial statements but for the concern of some auditors. Make a list of other types
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

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