Excercises – Session 1: Introduction to accounting

C1.1 Financial & Management accounting _ Weetman

The following extracts are typical of the annual reports of large listed companies. Which
of these extracts satisfy the definition of ‘accounting’? What are the user needs that are
most closely met by each extract?
(a) Suggestions for improvements were made by many employees, alone or in teams.
Annual savings which have been achieved total £15m. The best suggestion for
improvement will save around £0.3m per year for the next five years.
(b) As of 31 December, 3,000 young people were learning a trade or profession with
the
company. This represents a studentship rate of 3.9%. During the reporting period
we
hired 1,300 young people into training places. This is more than we need to satisfy
our employment needs in the longer term and so we are contributing to
improvement of the quality of labour supplied to the market generally.
(c) During the year to 31 December our turnover (sales) grew to £4,000 million
compared to £2,800 million last year. Our new subsidiary contributed £1,000 million
to this increase.
(d) It is our target to pay our suppliers within 30 days. During the year we achieved an
average payment period of 33 days.
(e) The treasury focus during the year was on further refinancing of the group’s
borrowings to minimise interest payments and reduce risk.
(f) Our plants have emission rates that are 70% below the national average for sulphur
dioxide and 20% below the average for oxides of nitrogen. We will tighten
emissions
significantly over the next ten years.

C1.2. Explain how you would class each of the following – as a sole trader, partnership or
limited company. List any further questions you might ask for clarification about the
nature of the business.
(a) Miss Jones works as an interior decorating adviser under the business name
‘U-decide’. She rents an office and employs an administrative assistant to answer
the
phone, keep files and make appointments. sole trader
(b) George and Jim work together as painters and decorators under the business name
‘Painting Partners Ltd’. They started the business ten years ago and work from a
rented business unit on a trading estate. limited company

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Excercises – Session 1: Introduction to accounting

(c) Jenny and Chris own a hotel jointly. They operate under the business name ‘Antler
Hotel Company’ and both participate in the running of the business. They have
agreed to share profits equally. partnership
C4.1. Choose one or more characteristics from the following list that you could use to
discuss the accounting aspects of each of the statements 1 to 5 and explain your ideas:
• relevance • understandability • completeness
• verifiability • materiality • predictive value
• comparability • neutrality • faithful representation
1. Director: ‘We do not need to tell shareholders about a loss of £2,000 on damaged

stock when our operating profit for the year is £60m.’

Relevance/materiality
2. Shareholder: ‘I would prefer the statement of financial position to tell
me the current market value of land is £20m than to tell me that the historical cost is

£5m, although I know that market values fluctuate.’ Predictive

value
3. Analyst: ‘If the company changes its stock valuation from average cost to First-in, First-
out, I want to hear a good reason and I want to know what last year’s profit would have

been on the same basis.’ Compairability

4. Regulator: ‘If the company reports that it has paid “commission on overseas sales”,

I don’t expect to discover later that it really meant bribes to local officials.’

Faithful representation,
Predictive value, verafiablity
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Excercises – Session 1: Introduction to accounting

5. Director: ‘We have made a profit on our drinks sales but a loss on food sales. In the
Notes to the Accounts on segmental results I suggest we combine them as “food and
drink”. It will mean the annual report is less detailed for our shareholders but it will
keep competitors in the dark for a while.’ Neutrality, comparability, materiality
E3-21. Financial Accounting _Weygandt.
a. Relevance f. Monetary unit assumption
b. Comparability g. Economic entity assumption
c. Completeness h. Time period assumption
d. Materiality i. Going concern assumption
e. Faithful representation j. Accrual-basis assumption
Match each item above with a description below.
1. ___b_____ Ability to easily evaluate one company’s results relative to another’s.
2. _____i___ Belief that a company will continue to operate for the foreseeable future.
3. ___d_____ The judgment concerning whether an item’s size is large enough to
matter
to decision-makers.
4. ____c____ The reporting of all information that would make a difference to financial
statement users.
5. ____h____ The practice of preparing financial statements at regular intervals.
6. ____a____ The quality of information that indicates the information makes a
difference
in a decision.
7. __g______ Tracing accounting events to particular companies.
8. ___e_____ The desire to minimize bias in financial statements.
9. ____f____ Reporting only those things that can be measured in monetary units.
E3-22 Net Nanny Software International Inc., headquartered in Vancouver, specializes in
Internet safety and computer security products for both the home and commercial
markets. In a recent statement of financial position, it reported a deficit (negative retained
earnings) of US$5,678,288. It has reported only net losses since its inception. In spite of
these losses, Net Nanny’s ordinary shares have traded anywhere from a high of $3.70 to a
low of $0.32 on the Canadian Venture Exchange.
Instructions
(a) What is the objective of financial reporting? How does this objective meet or not meet
Net Nanny’s investors’ needs?
(b) Why would investors want to buy Net Nanny’s shares if the company has consistently
reported losses over the last few years? Include in your answer an assessment of the
relevance of the information reported on Net Nanny’s financial

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statements.
*E3-23 A friend of yours, Ana Gehrig, recently completed an undergraduate degree in
science
and has just started working with a biotechnology company. Ana tells you that the owners
of
the business are trying to secure new sources of financing which are needed in order for the
company to proceed with development of a new health-care product. Ana said that her boss
told her that the company must put together a report to present to potential investors.
Ana thought that the company should include in this package the detailed scientific
findings related to the Phase I clinical trials for this product. She said, “I know that the
biotech industry sometimes has only a 10% success rate with new products, but if we
report all the scientific findings, everyone will see what a sure success this is going to be!
The president was talking about the importance of following some set of accounting
principles. Why do we need to look at some accounting rules? What they need to realize is
that we have scientific results that are quite encouraging, some of the most talented
employees around, and the start of some really great customer relationships. We haven’t
made any sales yet, but we will. We just need the funds to get through all the clinical testing
and get government approval for our product. Then these investors will be quite happy that
they bought in to our company early!”
Instructions
(a) What is accounting information?
(b) Comment on how Ana’s suggestions for what should be reported to prospective
investors conforms to the qualitative characteristics of accounting information. Do you
think that the things that Ana wants to include in the information for investors will
conform to financial reporting guidelines?