Accounting Word Questions PDF

2 mark questions Define limiting factor ○ A factor of production which restricts the level of activity or quantity of output Define provision ○ Provision is a liability of uncertain timing or amount Net present value ○ Pro: Takes into account the t...

2 mark questions Define limiting factor ○ A factor of production which restricts the level of activity or quantity of output Define provision ○ Provision is a liability of uncertain timing or amount Net present value ○ Pro: Takes into account the time value of money thus inflation is accounted for ○ Con: Cost of capital used to determine the NPV may be difficult to set and require some guesswork, hence may be highly inaccurate Payback method ○ Pro: Simple to calculated and easy to understand, hence preferred by managers and non-accountants ○ Con: Does not account for profits after payback period Average rate of return ○ Pro: Focuses on profit, often a firm’s primary objectives ○ Con: Does not take into account the time value of money, hence inflation is not taken into account Internal rate of return ○ Pro: allows for comparison of project with different lifespan as it is the discounted rate that makes NPV = 0 ○ Con: Complicated and will not be easily understood by non-accountants Profitability index ○ Pro: allows for the comparison of returns of different projects, even if the size of the projects are different Decrease in Inventories ○ Pro: Less cost of storing large amounts of inventory such as warehouse and security ○ Con: Narrower range of inventory which may result in failure to meet larger orders Decrease in trade payables ○ Pro: Credit rating/ trust to supplier may be improved, hence it may be easier to acquire more credits in the future ○ Con: Firm has less liquidity to spend in other areas of the business Explain purchase of shares in another company ○ They expect share price to increase in the future and profits may be made ○ They may want some control over other companies such as their suppliers  Explain why issue additional shares ○ Raise capital ○ Reduce gearing ratio 4 mark questions Process of budget preparation Identification of limiting factors that may determine other budgets such as production budget Consult with department to receive feedback and determine realistic figures such as consulting with the production department head to see if budgeted production level is achievable Produce a master budget, which is in essence a budgeted statement of comprehensive income Factors in determining goodwill Calculated using annual profits, where the higher the profits, the higher the goodwill, for instances, goodwill may be 3x the annual profits Taking into account the reputation and brand awareness of the firm, such as better brand reputation equals higher goodwill Marginal vs absorptional costing Marginal Costing ○ sees costs allocated to a time period, so may be argued that profit for that time period is more accurate ○ May follow the prudence concept as it often shows lower figures for closing inventory Absorptional costing ○ Sees costs allocated to products, may be useful to management to determine whether the products have been profitable ○ Follows the matching concept as it matches costs with revenues earned for a particular product Record card Pro: Clearly shows receipts, issues and running balance which could reduce theft  Running balance indicates clearly when inventory is low and reorders are needed Con: Only shows issues and not how much inventory is used by production Must be kept up-to-date less variances calculations will be wrong Uses of Share Premium Account Issue of bonus shares Pay premium on redemption of shares Write off preliminary expenses on formation of company 12/6 mark questions If all else fails, try bullshitting with numbers calculated via the question. Calculate any numbers/ratios possible should it seem helpful. Remember to write conclusions for all questions and write larger as impression marking. Use of ICT Financial ○ Pro: Assist in recording financial transactions and reduces the need of hiring a costly accountant when calculating annual profits for tax returns ○ Con: Hardware for ICT may be expensive if she has to buy the equipment. Software may also be expensive if she has to subscript monthly or buy it outright ○ Hardware often has a relatively short lifespan, software might require constant updates and new staff will need to be trained. Outside experts are also needed for maintenance issues which all increase costs. Technical ○ Pro: A bookkeeping software may ensure financial records are kept orderly as paperwork and physical bookkeeping could be very disorganized due to difficulties ○ Errors could be reduced as programmes automatically complete double entry after first entry is made, they can also produce financial statements automatically. Hence, calculations and financial statements can be done quicker ○ Con: May not require an ICT program for limited bookkeeping requirements as bank statements already provide the business with a  running bank balance and a summary of all income and expenses occurred through the bank ○ Computer crashes, freeze and power cuts may result in loss of crucial information. Human aspects ○ Pro: May find that the ICT program reduces her workload, may find implementing the program very rewarding ○ Con: May find understanding the ICT program difficult and trying to implement it frustrating. ICT is usually advantageous for bigger companies as they can spread the cost out whereas less so for smaller firms as costs are very high in proportion to their revenue for them. Evaluate budget as a tool for forecasting, planning and control Some budgets are under direct control of management which will mean they can accurately forecast the likely figures such as rates paid to labour Allows for a firm to see how a level of costs impacts on profit Variances can be analysed and remedial actions can be taken Ensures different departments are coordinated to ensure smooth operation however Forecasting may not be accurate Some costs are out of management control Some figures such as rents are unlikely to change yearly and therefore is a waste of time to draw up budgets, hence does not help with planning or control Evaluate the project (project appraisal): Net Present value +/- ARR higher or lower than cost of capital (discount factor) Payback period (not) within expected lifespan of project Gearing ratio (highly) geared at +/- 50% Profitability index above/below 1 Figures may only be estimated and may be incorrect Evaluate the project (Standard costing) Labour efficiency variance adverse/favourable Labour rate variance adverse/favorable Material usage variance adverse/favourable Material price variance adverse/favourable Could talk about whether the reason for the variances Evaluate the role of an auditor 5 key roles Leadership ○ Enquire and note in the audit report about the division of responsibilities, such as whether is CEO is also chairman of the board and the need for that to be changed Effectiveness ○ Enquire and note in the audit report to check that re-election of board members take place at regular intervals Accountability ○ Enquire and note in the audit report about the risk management when, for instance, taking a merger or acquisition Remuneration ○ Enquire and note in the audit report for peculiar instances such as a remuneration committee was involved in setting their own compensation Relations with shareholders ○ Enquire and note in the audit report about whether shareholders are given sufficient notice concerning the date of the annual general meeting Case for auditors ○ May be about to justify an alternative approach in corporate governance in writing, where they could advise or prepare the alternative approach Case against auditors ○ Likely to be expensive and may not provide good value for money and instead may benefit from hiring external corporate governance specialist Evaluate the redemption of shares Improve figures on ROCE, a key ratio where the performance of the company is judged Future dividends can be reduced due to reduced number of shares however Worsens gearing ratio and may deter future investments Will worsen liquidity of the company/may have better use for such funds Evaluate purchases on credit Likely to increase sales Likely to increase customer base and hence market share however Irrecoverable debts may result in lengthy and expensive court cases to obtain the monies due  May have to take out insurance to cover non-payment of debt which is likely to be expensive Evaluate the merger May allow for diversification and expansion of both business May benefit from EOS May make higher profits How much goodwill is being paid Vice versa Dilute ownership if paid in shares Worsens liquidity if paid in cash Ways to improvement earnings per share Increase net profit Reduce interest payment by paying off loans Reduce taxation by moving to lower tax locations Reduce number of ordinary share Evaluate the gearing ratio Whether use of debt was advantageous Higher interest reduces profits and hence tax Failure of repayment of debt may result in lenders taking collateral or wind up the firm Failure to pay dividends may reduce share price Highly geared firm may have difficulties in raising additional capital Evaluate the dividend payments Shareholders are kept happy and on the side of the company which may be important if there is a lot of shares / recent issue of new shares as that will dilute control of existing shares Dividend cover is x times so the firm can/cannot afford to pay this dividend easily. X amount of cash will leave the company which could have been spent on other areas of the business to improve future profits Dividend per share / dividend yield is x which is may increase/decrease the price of shares Evaluate the issue of debentures  Debentures may be issued at a lower interest rate than other sources of finance like bank loans Banks loans may not be available to firms which are making loses or have multiple active loans and/or bad credit history however Business may have to offer assets as collateral for the debenture which will be forfeited if the firm fails its repayment Debenture interest are usually paid every 6 months which will result in a larger sums of interest payments compared to bank loans paid monthly Evaluate the liquidity performance Firm (does not) have healthy levels of cash and cash equivalents at x Current ratio is x:1 Acid test is x:1 Liquidity has improved/worsened since previous years (repayment of) Bank loans/debenture/issue of shares/profits have improved/worsened liquidity Dividend is x which reduced liquidity Evaluate the importance of disclosing discontinued activities in financial statements Useful to readers as discontinued operations will not be realised in the future, hence allows more accurate prediction of future performance Allows for true and fair view of the accounts however Adds more figures to the financial statements which makes them more difficult to understand Takes extra time to add details which means extra expense will be incurred Evaluate flexible budgets Allows for good decision-making as different levels of output can be compared fairly May save management time and money as action only needs to be taken when there are adverse variances between the flexed budget and actual costs or output level Can predict costs and revenue for all different levels of sales compared to a fixed budget where it can only predict one Variances are more meaningful as quantity produced/sold are taken out of the equation however  Drawing up flex budget likely takes a long time Figures and often estimates or guesswork which make be inappropriate or misleading, leading to wrongful responses or action taken by management Evaluate issuing bonus shares vs final dividends For issuing bonus shares ○ No funds will leave the firm For final dividends ○ Does not dilute control of existing shares ○ Good dividend yield may cause share price to increase ○ Issuing more shares may cause share price to fall due to excess supply