Questions and Answers of Financial Accounting Theory

“Accounting standards aim to portray economic reality, rather than shape it.” This statement appears in a document entitled ‘Working in the public interest’. The definition of accounting
Two brothers are planning to set up a computer repair business together. They need to decide whether to work in partnership or whether to form a limited liability company. From an accounting and
Read again the Real World Case at the start of the chapter. In the extract on ‘How do we judge the impact of our work’, the report sets out the tools used to monitor, evaluate, assess and learn
In this conversation, David questions the usefulness and relevance of published financial statements because of the time taken to publish them. Leona defends the rigorous audit scrutiny. Would David
Explain how historical cost measurement differs from fair value measurement.
Is there any point in time where historical cost and fair value measurement are the same?
Which of the following is a correct statement of the accounting equation?(a) Assets plus liabilities equals ownership interest.(b) Assets minus liabilities equals ownership interest.(c) Assets equals
The following are possible descriptions of items that appear in statements of financial position (balance sheets):(i) Cash, described as a current asset(ii) Finished goods inventory (stock),
Companies acquire non-current (fixed) assets for a variety of reasons, including:(i) to act as a hedge against inflation(ii) to resell at a profit in the future(iii) to avoid holding cash
Which of the following is normally NOT a current asset?(a) Cash(b) Inventory (stock)(c) Vehicles(d) Trade receivables (debtors)
How many non-current (fixed) asset items are included in the list shown below?(a) One item(b) Two items(c) Three items(d) Four items The following is a list of items that may appear in the annual
How many current liability items are included in the list shown below?(a) One item(b) Two items(c) Three items(d) Four itemsThe following is a list of items that may appear in the annual financial
How many non-current (fixed) asset items are there included in the list shown below?(a) One item(b) Two items(c) Three items(d) Four itemsThe following is a list of items which may appear in the
How many current asset items are there included in the list shown below?(a) One item(b) Two items(c) Three items(d) Four itemsThe following is a list of items which may appear in the annual financial
Classify each of the items in the following list as an asset, a liability or neither an asset nor a liability. Explain whether each item identified as an asset or a liability would meet the
Read the dialogue between David and Leona in Section 2.12. What errors can occur in reporting the amount of ‘inventories’ (stocks) in financial statements?Data from Section 2.12 DAVID: I've now
The following information has been gathered from the accounting records of Jonathan’s Hair Stylists.Using the accounting equation, calculate(a) the amount of ownership interest at 30 September Year
The Financial Reporting Council (FRC) in the UK has set out an accounting standard for micro-entities, which are the very smallest companies. Typically they have fewer than 10 employees. One
Most people think about their personal liabilities in historical cost measures. What are the forms of personal or household liabilities commonly found?
How does the ownership interest in a business increase or decrease after the business has started operating?
What kinds of error, either deliberate or intentional, can lead to overstatement of assets? What is the effect on the accounting equation? How do auditors check for evidence of overstatement of
Which of the following is equal to ownership interest if it is assumed that there are no long-term liabilities?(a) Current Cassets + current liabilities(b) Non-current (fixed) assets + current
What is the amount of total current assets?(a) £125,000(b) £150,000(c) £180,000(d) £255,000Black and Partners has listed the following amounts in its statement of financial position (balance
What is the amount of total non-current (fixed) assets?(a) £75,000(b) £105,000(c) £130,000(d) £190,000Black and Partners has listed the following amounts in its statement of financial position
What is the amount of total current liabilities?(a) £35,000(b) £40,000(c) £50,000(d) £60,000Black and Partners has listed the following amounts in its statement of financial position (balance
What is the amount of the ownership interest?(a) £65,000(b) £85,000(c) £170,000(d) £190,000Black and Partners has listed the following amounts in its statement of financial position (balance
Suggest an argument to support having businesses report quarterly (every three months) rather than once in each year.
Explain how the calculation of profit and operating cash flow provide different but complementary information, using Table 3.8 as your source of information. Table 3.8 Comparison of profit and
What is your opinion on the relative usefulness of the cash flow statement, compared to the statement of financial position and the income statement?
Prepare a statement of financial position (balance sheet) from the following list of assets and liabilities using the accounting equation to deduce the ownership interest as the missing item. Amounts
Explain how the statement of financial position (balance sheet) prepared in B3.3 will change for each of the following transactions?(a) The full amounts of £5,000 due from customers are received.(b)
Which of the following entities is required to apply the accounting requirements of the Companies Act?(a) Partnership(b) Sole trader(c) Limited company(d) A museum owned by a local government
Consider the following comments regarding the position of auditors of limited companies.(i) The audit opinion applies to all parts of the annual report.(ii) Auditors have a responsibility to detect
In the UK, the level of disclosure in financial statements is primarily influenced by a combination of(i) accounting standards(ii) financial services authority listing rules(iii) employers’ desires
Which of the following statements about the UK Corporate Reporting Council is/are correct?(i) The aims of the UK Corporate Reporting Council are to establish and improve standards of financial
In determining the profit of an entity which of the following measurement principles states that revenue and expenses are recognised as they are earned or incurred and not as money is received or
In determining the profit of an entity, which of the following measurement principles states that it is assumed the enterprise will continue in operational existence for the foreseeable future?(a)
Which of the following statements is correct?(a) The Financial Reporting Council is a UK government department.(b) The Financial Reporting Council is the UK’s independent regulator for corporate
Which of the following is/are correct in relation to UK limited companies?(a) Accounting information must be made public through the Registrar of Companies.(b) Accounting information requirements
Which of the following statements explains why ‘reliability’ does not appear in the 2018 Conceptual Framework of the IASB?(a) Reliability is no longer seen as a key feature of financial
Which of the following statements is/are correct?(a) The Conduct Committee (previously the Financial Reporting Review Panel(FRRP)) was established by the Financial Reporting Council.(b) The Conduct
Which of the following statement is/are correct?(a) All pages of the annual report of a typical public company are heavily regulated by the company law.(b) The auditors are responsible for preparing
Which of the following statements is correct?(a) Customers have a right of access to the day-to-day accounting records of limited companies.(b) Directors have a right of access to the day-to-day
Which of the following statements is/are correct?(a) The shareholders appoint the auditors.(b) The auditors’ code of practice is called Accounting Standards.(c) The auditor has a legal obligation
An audit is planned and performed to ‘give a ………. assurance that the accounts are free from ………… misstatement’.Which of the following pairs of words correctly completes the above
Suggest reasons for the existence of more than one source of regulation of financial reporting by listed companies.
Explain why it is essential to have a statement of financial position (balance sheet), income statement (profit and loss account) and statement of cash flows in the annual report of a listed company.
Analyse each of the following transactions to show the two aspects of the transaction: Apr. 1 Apr. 1 Apr. 2 Apr. 3 Apr. 4 Apr. 15 Apr. 20 Apr. 21 Apr. 29 Apr. 29 Apr. 30 Apr. 30 Jane Gate commenced
Which of the following reflects the effects of a payment to creditors on the accounting equation?(a) Assets decrease: ownership interest decreases.(b) Assets decrease: ownership interest
Which of the following reflects the effect of a purchase of an item of plant and equipment, for cash, on the accounting equation?(a) Assets increase: ownership interest decreases.(b) Assets decrease:
Which of the following economic actions reduces the amount of ownership interest?(a) A payment of administration wages(b) A receipt of cash from trade receivables (debtors)(c) A receipt of a loan
Which of the following economic actions increases the amount of ownership interest?(a) A purchase of raw material on credit(b) The provision of a service to a customer on credit(c) A payment for a
Which of the following economic actions decreases the amount of current assets?(a) A payment for rent in advance of occupancy of the property(b) A purchase of equipment on credit(c) A purchase of
What is the amount of current assets at the end of Day 1?(a) £5,000(b) £8,000(c) £15,000(d) £18,000The following information about Day 1 applies to question.Day 1T Harding and Co has commenced
What is the amount of ownership interest at the end of Day 1?(a) £10,000(b) £15,000(c) £23,000(d) £28,000The following information about Day 1 applies to question.Day 1T Harding and Co has
What is the amount of cash at the end of Day 2?(a) £8,800(b) £16,800(c) £21,800(d) £24,800 The following information about Day 2, together with the previous information about Day 1, applies to
What is the amount of non-current (fixed) assets at the end of Day 2?(a) £4,000(b) £5,000(c) £9,000(d) £24,000The following information about Day 2, together with the previous information about
What is the amount of the ownership interest at the end of Day 2?(a) £17,800(b) £22,000(c) £27,000(d) £29,800The following information about Day 2, together with the previous information about
What is the amount of trade payables (creditors) at the end of Day 3?(a) Nil(b) £4,100(c) £7,000(d) £12,000 The following information about Day 3, together with the previous information about
What is the amount of non-current (fixed) assets at the end of Day 3?(a) £3,650(b) £4,400(c) £5,350(d) £8,600The following information about Day 3, together with the previous information about
What is the amount of the ownership interest at the end of Day 3?(a) £8,950(b) £9,350(c) £17,050(d) £22,450The following information about Day 3, together with the previous information about Days
A spreadsheet is provided for use in part (b) of this question. The following list of transactions relates to a television repair business, Peter (Television) Company, during July, which is its first
At what point in the sequence of events in Table 6.4 is the ownership interest affected? Table 6.4 Transactions of a manufacturing company July 1 July 3 July 4 July 5 July 10 July 10 Purchase raw
Why is ownership interest not affected before that point in the sequence?
How would the ownership interest have been affected if, on 5 July, there had been a fire as the goods were being transferred to the finished goods store and one-quarter of the finished trays were
Which of the following reflects the effect of the delivery of finished goods to customers on the accounting equation?(a) Assets decrease: ownership interest decreases(b) Assets decrease: ownership
Which of the following reflects the effect of the customer accepting the finished goods with a commitment to pay for them in 1 month’s time on the accounting equation?(a) Assets decrease: ownership
Which of the following economic actions increases the amount of current assets?(a) A receipt of cash from customers(b) A purchase of raw material on credit(c) A purchase of raw material for cash(d) A
What is the amount of total sales of the retailer?(a) £440(b) £600(c) £715(d) £875The following information applies to question.The following are business transactions of a retailer:Purchased 150
What is the total cost of goods sold by the retailer?(a) £440(b) £600(c) £715(d) £875The following information applies to question.The following are business transactions of a retailer:Purchased
What is the total profit of the retailer?(a) £115(b) £275(c) £440(d) £875The following information applies to question.The following are business transactions of a retailer:Purchased 150 items of
What is the value of the closing inventory (stock) of the retailer?(a) Nil(b) £160(c) £275(d) £440The following information applies to question.The following are business transactions of a
What is the amount of total sales of the manufacturer?(a) £900(b) £1,100(c) £1,760(d) £2,400 The following information applies to question.A manufacturing company has carried out the following
What is the total cost of goods sold by the manufacturer?(a) £660(b) £900(c) £1,100(d) £1,500The following information applies to question.A manufacturing company has carried out the following
What is the closing raw material inventory (stock) of the manufacturer?(a) Nil(b) £600(c) £900(d) £1,500The following information applies to question.A manufacturing company has carried out the
What is the closing work in progress of the manufacturer?(a) Nil(b) £400(c) £660(d) £900The following information applies to question.A manufacturing company has carried out the following business
What is the closing inventory (stock) of finished goods of the manufacturer?(a) £400(b) £660(c) £1,100(d) £1,500The following information applies to question.A manufacturing company has carried
What is the total profit of the manufacturer?(a) £660(b) £900(c) £1,100(d) £1,500The following information applies to question.A manufacturing company has carried out the following business
Which of the following is a typical cost of distribution?(a) Depreciation of plant and machinery(b) Wages of production staff(c) Repairs to plant and machinery(d) Packing and delivering goods to
On reviewing the financial statements for the year that ended at 31 December Year 2, the company’s accountant discovers that a sale amounting to £10,000, made on 29 December Year 2 to a credit
The following transactions relate to Computer Assembler Company during the month of May.Required:(a) Calculate the profit on sale.(b) Explain the effect of each transaction on the accounting
The following list of transactions relates to the business of Electrical Retailers during the month of November.Required:(a) Make entries in a spreadsheet for the above transactions similar to that
Weston plc produced the following draft statement of financial position (balance sheet) as on 1 May Year 4.During June, the following transactions and events occurred:1. The company bought stock
Brian Grant set up a business selling quality electrical goods on 1 May 2001. The following represents the business transactions of the first month.1. Brian paid £250,000 to the business bank
What is the objective of the IASB?
How has the IAS Regulation of the EU influenced financial reporting by UK companies?
How have Directives of the EU influenced financial reporting by UK companies?
Which of the following is the best description of convergence of accounting in Europe?(a) From 2005, all accounting standards in the European Union are prepared by the European Commission.(b) From
Which of the following items of information would you expect to find in a published income statement (profit and loss account)?(i) The revenue (sales) of the period(ii) The amount of work in
In a statement of cash flows, which of the following is reported as causing a decrease in cash generated from operating activities?(a) Increase in inventory (stock)(b) Decrease in trade receivables
In a statement of cash flows, which of the following is reported as causing an increase in cash generated from operating activities?(a) Increase in trade receivables (debtors)(b) Increase in
Which of the following statements is correct?(a) Consolidated financial statements are required where a subsidiary undertaking controls its parent undertaking.(b) Consolidated financial statements
Which of the following statements is the best definition of goodwill arising on acquisition?(a) The difference between the fair value of the price paid for the subsidiary and the net book value of
Holder plc paid £3m to acquire the entire share capital of Sunder Ltd. At the date of acquisition, the fair value of the share capital and reserves of Sunder Ltd was £2m.What is the amount that
Which of the following is a condition that helps identify the presence of an associated company?(a) Dominant influence(b) A director of the parent holds shares in the associate(c) Significant
What is Accounting Information System?
Give three examples of a transaction processing system.
State the relationship between information and decision.
From the information given below ascertain the profit for the year : Capital at the beginning of the year Additional capital introduced during the year Stock Sundry debtors Business premises
Mr. Muneesh maintains his books of accounts from incomplete records. His books provide the information :He withdrew Rs. 300 per month for personal expenses. He sold his investment of Rs. 16,000 at 2%

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