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principles financial accounting

Principles Of Financial Accounting 3rd Edition Ian Gillespie, Richard Lewis, Kay Hamilton - Solutions

Eully depreciated equipment costing $55,000 was discarded. What was the ef¬ fect of the transaction on cash flows if (a) $5,000 cash is received, (b) no cash is received?AppendixLO1
Eor the current year, Accord Company decided to switch from the indirect method to the direct method for reporting cash flows from operating activities on the statement of cash flows. Will the change cause the amount of net cash flow from operating activities to be (a) larger, (b) smaller, or (c)
Name five common major classes of operating cash receipts or operating cash payments presented on the statement of cash flows when the cash flows from operating activities are reported by the direct method.AppendixLO1
In a recent annual report, eBay Inc. reported that during the year it issued stock of $128 million for acquisitions. How would this be reported on the statement of cash flows?AppendixLO1
8.1 Looking at Example 8.1, give your reasoned overall view of the results. Explain which method (if any) is, in your view, the ‘best’ or ‘correct’ method.
8.2 ‘The choice of method used to determine the cost of goods sold is not very important because it makes very little difference in the long run.’ Discuss.
8.3 The various methods of stock valuation will, when prices are changing, result in signi¬ ficantly different figures of cost of goods sold and, therefore, of reported profit. Discuss the effect that this has on the accuracy and usefulness on conventional historical cost accounting statements.
8.4 ‘The use of replacement cost in stock valuation provides a much more useful result than any conventional method.’ Discuss.
8.1 During his first year of trading, Ted made the following purchases and sales:Purchases January 2,000 units @ £3.00 6,000 Sales April 1,000 units @ £3.40 3,400 May 1,600 units October 3,000 units @ £4.00 12,000 November 1,600 units 21,400 Calculate Ted’s cost of goods sold and closing stock
8.2 1. No opening stock.Purchases Sales(units)January 100 @ £x June 80 December 60 @ £5 FIFO stock at the end of December, £360. Find x.Opening stock 100 units. Average cost £5 per unit.Purchases Sales(units)January 200 @ £x June 120 December 80 @£10 Average (perpetual) cost of stock at the
8.3 J- Town s stock at 1 January 20X0 consisted of 100 units, costed as follows:FIFO 100 units @£60 £6,000 Average cost 100 units @ £55 £5,500 During the year ended 31 December 20X0 Town made the following sales and purchases:Purchases Sales(units)January 10 @£60 March 40 April 80 @£100 June
8.4 The following trial balance was extracted from the books of Juva, a sole trader, as at 31 December 20X1.££Capital account at 1 January 20X1 45,200 Purchases 194,100 Sales 261,450 Wages and salaries 16,720 Rent and property charges 12,930 Debtors 36,400 Sundry expenses 2,500 Drawings 9,500
8.5 Nora Ferber’s trial balance at 30 June 20X3 was as follows:.££Motor vehicles, at cost 90,000 Debtors 80,500 Stock 120,000 Drawings 107,000 Cost of goods sold 490,000 Wages 47,500 Rates 30,000 Sundry expenses 10,000 Rent 45,000 Capital account 1 July 20X2 97,500 Provision against doubtful
8.6 Smith’s stock at 1 January consisted of 100 units. Smith uses the average cost method of stock/cost of goods sold.The stock as at that date was as follows:100 units @ £725 each, average cost = £72,500 During the year Smith made the following purchases and sales:Purchases Sales
11.1 ‘Many people (not only students but also business people) think that ‘capital’ is an asset, or even actual money, which can be spent on new investments.’ Discuss this statement.
11.2 ‘The differences between the accounts of sole traders, partnerships and limited companies arise from the way in which firms are owned, not because of the law.’ Discuss.
11.3 Owner’s equity is a claim on the company’s assets, as are the total liabilities. Explain the similarities and differences between the two.
11.4 Explain the nature of the charge for corporation tax in the accounts of a limited company. Is it an expense, or is it something else entirely?11.1 The following accounting information relates to Past Limited for the year to 30 June 20X3:Trial balance at 30 June 20X3 ££Share capital 200,000
11.2 The following is the trial balance of Anne Smith Ltd at 31 December 20X3:££Share capital 1,350,000 Share premium account 428,000 Loan capital 180,000 Freehold land and buildings 850,000 Leasehold land and buildings 440,000 Plant and equipment 2,940,000 Accumulated depreciation:Freehold land
11.3 The trial balance of Alan Jones & Co. Ltd, a trading company, as at 31 December 20X1 was as follows:££Profit and loss account 120,000 Ordinary shares of £l each 1,000,000 Share premium account 80,000 Land and buildings at cost 800,000 Motor vehicles at cost 400,000 *Creditors - trade
11.4 The trial balance of van der Pant Ltd, a trading company, as at 31 December 20X0 was as follows:££Sales 4,500,000 Purchases 3,000,000 General expenses 840,000 Debenture interest 25,200 Debentures, 7%360,000 Ordinary share capital 1,200,000 Share premium 30,000 8% preference shares 300,000
11.5 The following balances have been extracted from the books of Ekswye Co. Ltd at 31 December 20X2:Called-up share capital 600,000 Ordinary shares at £1 each 300,000 6% Preference shares at £l each Share premium account Revaluation reserve Profit and loss account 5% Debenture loans Debtors
11.6 The following is the trial balance of Baxter Ltd as at 31 December 20X3:££Called-up share capital 4,000,000 Profit and loss account 329,600 8% Debenture loan 800,000 Plant and machinery at cost 5,840,000 Lixtures and fittings at cost Accumulated depreciation 704,000- plant and machinery at
14.1 ‘It really does not matter whether the accounts of a club are correct or not, because clubs are not incorporated under the Companies Acts.’ Discuss.
14.2 ‘The objectives of a golf club are very different from those of a grocer, yet the only differ¬ ences between their financial accounts are terminological.’ Discuss.
14.3 Comment on the main principles underlying the financial statements of charities and comment on the extent to which you feel the form of the statement serves the interest of the different groups who have a legitimate interest in them.
14.1 Bewley Rugby and Field Sports Club. The following receipts and payments account for the year ended 31 December 20X6 has been prepared.Receipts Payments££Opening balance 2,400 Rent of rugby fields 8,300 Entrance fees 2,000 Bar purchases 18,660 Subscriptions 12,000 Printing & stationery 3,520
14.2 The treasurer of the Crown Bowling Club disappeared on 31 March 20X3, taking with him the majority of the books and records of the club. The club’s year end is 31 March. At the request of the club’s committee you are asked to examine the financial implications of the treasurer’s
15.1 If you were asked to advise on which main method of branch accounting to use, explain under what circumstances you would recommend each method.
15.2 Explain why items in transit at the accounting date cause a problem, and how the problem should be dealt with.
15.1(a) (i)(ii)(iii)(iv)City Co., which has its head office in London, opened a branch in York by trans¬ ferring £500,000 from its London bank account to a new York bank account, on 1 January.Head office purchased premises for York branch for £600,000, paying by cheque drawn on its London bank
15.2 The following information relates to the current accounts of Branching Co. head office and its Dover branch for the month of May.Head office records£Opening balance b/d debit 18,700 Goods supplied to Dover branch 22,500 Cheques received from Dover branch 19,700 Returns received from Dover
Identify and discuss the risks involved in accounting systems that are reliant on computers.
Define ‘audit trail’ and explain how it can be affected by the introduction of computerised accounting.
1. Explain what is meant by an audit, distinguish between private and statutory audits and list the advantages of having an audit;
2. Outline the contents of an audit report;
3. Define a qualified audit and explain the main reasons for qualification;
4. Discuss the importance of the independence of auditors;
5. Outline audit procedures;
6. Outline the special considerations when auditing computerised accounting systems;
7. Explain the advantages, for the purposes of the external audit, of having an internal audit.
17.1 Explain the difference between private and statutory audits. Why is it advantageous to have an audit even if it is not required by law?
17.2 The auditors need ‘reasonable assurance that the accounts are free from material misstate¬ ment’. Discuss.
17.3 Explain what is meant by a ‘qualified report’. What are the main reasons which make such a report necessary?
explain the main objectives of accounting;
discuss some of the main problems of income measurement and valuation;
explain how the application of the conventional model of accounting may distort the reported results, especially with regard to trends in activity and comparison between firms;
explain how figures of distributable profit are likely to be misleading, especially with regard to amounts to be withdrawn from the business for consumption;
explain some of the ways in which the figures may be deliberately distorted to show the desired results;
make the basic calculations needed in replacement cost accounting;
explain the advantages and disadvantages of replacement cost accounting.289
18.1 Potential investors are interested in companies which will be successful in the future. However, financial accounting reports only on the past. Does it matter, therefore, if the results are distorted, either accidentally or deliberately?
18.2 ‘Perhaps the most important decision, from the point of view of the owners of a business, is the consumption decision. Unfortunately, the reported profit figure may be distorted when prices are changing.’ Discuss, including some simple figures to illustrate the problem.
18.3 Rachel Cohen is the managing director and main shareholder of a small limited company. She tells you that she bases her financial decisions on the company’s financial statements^ ‘After all,’ she says, ‘they show me the true profit and the value of the company.’ Reply to her.
18.4 Explain some of the ways in which results may be deliberately manipulated. What is it about the conventional accounting system that allows this to happen?
18.5 The treatment of goodwill is a particularly difficult problem. Explain how this may be manipulated to show the desired results.
18.6 Investment Trust pic has recently stated in an advertisement that an investment in its Fund A of £10,000 made ten years ago would now have a cash value of £2.5,000. Assuming that the statement is factually correct, explain why it may be misleading.
18.7 "The use of historical costs in accounting produces results which are, at best, useless and, at worst, grossly misleading.’ Discuss this statement.
18.8 The use of replacement costs in accounting will produce figures which will be more useful in making the consumption decision than will the use of historical costs. Discuss.
18.1 Trevor Jones started business by investing £200,000 in a new trading firm. He then buys 1,000 units of stock for resale at £200 each. Just before the end of his first trading period he sold all the units for cash, at £350 each. At the time of the sale, the replacement cost of one unit was
18.2 Polly and Mona have each been given £100,000 by their aunt, Miss Nab. Polly and Mona have used the money to set up separate trading businesses.During the first year of trading Polly made the following purchases (for cash) of Product X:600 units at £60 each £36,000 300 units at £80 each
18.3 Life, Universe and Everything Co. Ltd trades in one product, ‘galaxies’. The company’s stock as at 1 January 20X2 consisted of 20,000 galaxies, costed as follows:Basis Units Price per unit £ Total £FIFO 20,000 40 800,000 During the year ended 31 December 20X2, the company made the
18.4 The retained profits of Ondex Ltd were as follows:For the year Carried forward Year l £200,000 200,000 Year 1 Year 3£ £210,000 250,000 410,000 660,000 The chairman, in his report, says that retained profits attributable to shareholders have increased each year.Comment on the chairman’s
18.5 On 1 January 20X1, N.N. Tree, a retired accountancy lecturer, started a business selling caravans. His starting capital was £100,000. His purchases and sales during 20X1 were as follows:Purchases 2 January 10 caravans at £5,000 each 10 July '15 caravans at £6,000 each Sales Replacement cost
18.6 Sue Poly is a trader in ‘Modules’. She set up business with a capital of £10,000 which was left to her in the will of her aunt.During the first year of trading, she made the following purchases of ‘Modules’ (for cash):600 at £6 each £3,600 300 at £8 each 2,400 400 at £10 each
18.7 (i) Show how the following figures misrepresent Groco’s physical activity:Year 12 34£000£000£000£000 Sales per accounts 200 220 240 260 A suitable specific price index for these goods 100 110 115 120 ii) Kashko Ltd has the following cash outlays:%Year 12 3£000£000£000 Cash outlays 300
discuss the main differences in international financial reporting and their causes;
explain the problems of making comparisons of financial statements from different countries;
discuss the main issues and problems in the harmonisation of financial reporting.
19.1Explain how the following have affected accounting in different countries:(a) the concept of fairness;(b) the law;(c) taxation;(d) ownership and financing of companies:(e) accounting theory;(f) history.
19.2 Explain the meaning of ‘hidden reserves’ and how they may be created, illustrating your answer with simple figures.
19.3 Discuss the problems a financial analyst may face in comparing the results of a German company with those of a UK company.
19.4 Discuss the desirability of harmonisation of financial reporting, the attempts made so far and the prospects for the future.325
understand the reasons why there will normally be a difference between the profit and loss for the period and the change in the cash balance;
understand the format of the cash flow statements which will be included in published financial statements;
describe the way in which the information provided in a cash flow statement might help in the assessment of the current financial position of a company and of its future prospects;
derive a cash flow statement for an entity from its detailed profit and loss account and balance sheets.
20.1 Why is it important to distinguish between cash derived from operations and cash obtained from other sources?
20.2 If the cash flow statement is so informative, why bother with the profit and loss account?’ Discuss.
20.1 Assess the impact of the following on the profit and loss account, the balance sheet and the cash flow statement:(a) The company provided for depreciation of £30,000 on fixed assets for the year.(b) The company issued shares with a nominal value of £1 per share at a price of £1.60.(c) The
20.2 The balance sheets of Duncan Ltd are summarised below:As at As at 31.12.X5 31.12.X6£000£000£000£000 Fixed assets Land and buildings 1,980 1,540 Plant and machinery 205 230 Less: Depreciation 104 101 110 120 2,081 1,660 Current assets Debtors 1,000 1,050 Less: Current liabilities Creditors
20.3 The following information is extracted from the financial statements of Kerr and Bush Ltd on 31 October 20X6.Profit and loss account for the year ended 31 October 20X6£000£000 Sales 2,000 Operating expenses 820 Depreciation 200 Goodwill amortised 100 1,120 Operating profit 880 Debenture
20.4 The following information has been extracted from the financial statements of Curasco Ltd at 31 December 20X7.Balance sheets 31.12.X6 31.12.X7 Fixed assets££££Freehold property 200,000 300,000 Plant and machinery 400,000 500,000 Less: Depreciation 200,000 250,000 200,000 250,000 400,000
20.5 The following are the summaries of the financial statements of Aster Ltd for the past two years.Balance sheets 31..12.X6 31 A2.X7£000£000£000£000 Fixed assets Land and buildings Plant and machinery 600 500 650 508 Less: Depreciation 198 402 258 392 902 900 Current assets Stock 200 275
20.6 The following information has been extracted from the financial statements of Bennett and Grange Ltd for the years ended 31.12.X6 and 31.12.X5.Balance sheets 31.12.X5 31.12.X6£000£000£000£000 Fixed assets Land and buildings 1,100 1,100 Fixtures and fittings 380 700 1,480 1,800 Current
explain the purposes of the analysis of financial statements;
calculate liquidity, solvency and profitability ratios, and explain their significance;
explain the differences between cross-sectional and time series analyses and their different purposes;
carry out comparative ratio analyses and interpret the results.3
21.1 How does the use of ratio analysis help in the decision-making process?
21.2 As a shareholder, which profitability ratio would be most important to you? Why is this and what decisions might it help you with?
21.3 The first ratio to be developed was the current ratio. Why do you think this was?
21.4 Discuss the limitations of ratio analysis and why they arise. Do you think that they are so serious as to undermine the validity of this approach to the analysis of financial statements?Exercises for Chapter 21 are combined with those for Chapter 22.357
calculate the coverage and debt to equity ratios;
explain the significance of these ratios;
calculate the earnings per share, and explain its significance and limitations;
calculate return on capital employed and explain its significance;
ensure that you know the basis of calculation of all the financial ratios we have covered.
22.1 The coverage ratio which is normally used is, in fact, not really suitable for the purpose. Explain why this is so and how it might be improved.
22.2 The debt to equity ratio may be used to measure risk. What kind of risk is this, who faces it and how does the ratio help to assess it?

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