Acc theory answers

State three possible reasons why the partners may wish to dissolve the partnership
Mutual agreement between the partners to dissolve the business
Completion of a project for which the partnership was formed
Expiry of the agreed term of the partnership if it was formed for a pre-determined period
Death or retirement of all the partners or except one partner
Disagreement of partners
Formation of a limited company to take over of the partnership businesses
When the partnership business is no longer profitable
Discuss three problems that may arise in a partnership but would not occur in a limited company
Each partner is personally liable to trade payables for all debts incurred by the partnership. This means that if trade payables cannot be
paid from partnership assets, they may seek to have their claim satisfied from the personal assets of the individual partners in contrast to
companies where shareholders enjoy limited liability.
Each partner acts as an agent of the partnership with authority to bind the partners and partnership to contracts with other parties, which
may affect the negativity and personal interest of the other partners, whereas the personal commitment of a company’s shareholders has
no bearing on other shareholders
A partnership dissolves with any change in the personnel of its membership or on the expiry of a period (when formed for a specific
period) or on the completion of a project (when formed for that particular project). So, the partnership has a limited time in comparison to
a company, which normally enjoys perpetual succession
Responsibilities of partners
Agreements on share of profit/loses
Agreements on death/retirements etc
Explain what would happen if the dissolution of the partnership resulted in a debit balance on a partner’s capital accounts
This represents the amount owed by the partner to the partnership. The partner will have to pay this owing amount from his resources to
enable the partnership to settle the outstanding amount to the other partners.
Amit has recently advised the partners that he is having financial difficulties. He has asked Wang and Susi for the payment of the balance
on the interest-free loan account as soon as possible. Advise Wang and Sushi whether or not they should agree to Amit’s request.
Repayment of Amit’s loan depends on the agreement on the initial loan. The partnership has insufficient liquid assets at present so may
need additional funds. To arrange funds for the repayment of Amit’s loan, an additional loan has to be arranged which may require
collateral. The additional interest on the new loan borrowed may reduce profits. May require security for the loan too.
Explain the difference between a realization account and a revaluation account.
A revaluation account is a nominal account carrying only an increase and decrease in the value of the assets and liabilities from the last
date of the SOFP to current values. It is prepared at the time when there is a change in profit sharing ratio between existing partners when
a new partner is admitted into the partnership firm or when any one or more partners retire or die. The realization
account is prepared at the time of dissolution. The balance on the Realisation account represents profit or loss on the dissolution of the
business.
FINANCIAL STATEMENTS OF COMPANIES
State five advantages of limited liability companies over sole traders or partnerships (5)
ADVANTAGES: Shareholders enjoy limited liability. The private property of the shareholders is not liable to settle the business obligations.
Company, as a separate legal entity, continues to exist despite changes in the ownership by a transfer of shares. A company therefore
enjoys perpetual succession. Shares of a company can easily be transferred to other people without the consent of other shareholders
DISADVANTAGES: Compliance with the Companies Act imposes an increased administrative burden on the company. Tighter
government regulations and more extensive disclosure. A company’s affairs are less private than those of a sole trader or sole or
partnership since company accounts are made available for public inspection.
State two advantages and two disadvantages of partnership and a private limited company
Partnership:
ADVANTAGES: Ability of additional capital, sharing of managerial responsibilities results in shred workload and less stress, spread of risk as
losses will be shared.
DISADVANTAGES: Liability of the partner for debts of the firm is unlimited, limited life span like death or insolvency of partner(s) dissolves
the partnership, possible disputes between partners
Private limited company:
ADVANTAGES: Ability of additional capital, limited liability of shareholders, shared workload
DISADVANTAGES: Possible disputes between shareholders, all shareholders may not take in running the business, more complex financial
statements and administrative work.
Anjali and Bialey trade as partners. They share profits and losses in the ratio 3:2. Explain whether or not Anjali and Bailye made the
correct decision to form a limited company.
Anjali and bailey’s partnership have low working capital. The partnership had overdrafts and its trade payables were more than its trade
receivables. In the absence of inventory or in case of its sales then partnership had a negative working capital.
As partnerships have unlimited liability and limited companies have limited liabilities, it seems to be a prudent action to form a limited
company, in order to protect the personal assets of partners.
Explain the function of an appropriation account in partnership and a limited company
Appropriation account of a partnership only shows how profits of a firm are distributed among the partners on account of interest on
capital, salaries and etc.
There is no last year profit/loss to be adjusted to current year’s profit/loss
Appropriation of a company not only shows the distribution of profits among the shareholders as dividends but also the retention of profit
as reserves
Last year’s profits or loses are adjusted to currents year’s profit or loses
Explain three differences between a provision and reserves
Provisions are amounts written off or unknown future loses or to strengthen financial position of the business.
Provisions are created by debiting retained earnings by way of providing for depreciation, diminution or renewals of assets or for any
known liability the amount of which cannot be acutely determined whereas reserves are created for meeting profit and loss account,
whereas reserves are created by debiting profit and loss appropriation account.
A provision cannot be distributed among the shareholders as dividends whereas reserves can be.
A provision is created irrespective of the fact whether there is profit or loss whereas reserves are created based on whether there are
sufficient profits
Explain, briefly between a liability and a provision
A liability is a present obligation a s a result of past events and its amounts may be determined with some level of accuracy. Examples
include trade payable of goods, accrued expenses, etc. a provision is a liability of uncertain timing or amount as in not readily determinable
with sustainable accuracy. Examples include, warranty obligations, legal or constructive obligation to clean up contaminated land or restore
facilities; and a retailer’s policy to refund.
State what is meant by ‘revaluation reserve’
A revaluation reserve arises when a company revalues its non-current assets at a value which is higher than their current net book values
Explain how a share premium account arises and its uses
A share premium account arises when a company issue shares for a price which is higher than their nominal value. The excess of selling
price over the face value is called Share Premium. the account is used for:
To pay up un-issued ordinary shares to existing ordinary shareholders as bonus shares
To write off preliminary expenses
To write off expenses incurred in the issue of shares and debentures
To provide for any premium payable on the redemption of shares and debentures
Describe the treatment of a proposed final dividend in the financial statements
The proposed final dividend of current year need shareholder’s approval at the Annual General Meeting and accordingly is not provided for
in the financial statements and can only be disclosed by way of a note in the financial statement. This implies that the current year's
interim dividend and last year's final dividend paid during the current year (provided the latter has been approved by the shareholders) will
be included in the current year's financial statement.
State three items that should be contained in the director's report which accompanies the financial statements of a company
The state of affairs of the company review of business performance during the year
Statement of company principle activities with significant changes
And an indication of research and development activities of the business
Or statement of political and charitable donations
Propose transfer to Reserves
Amounts of recommended dividends
Details of director's remuneration
Names of directors and their Holdings of shares and debentures in the company
Statement of principal risks and uncertainties which the company is facing
Statement of details of Annual General Meeting AGM
State 5 matters which should be included in the director's report. Give reason why each of the matters you have identified is important
Review of the development of the company's business during the year and its position at the end of the year. The income statement and
the statement of financial position only provide information that can be expressed in monetary terms (Money Measurement Concept) they
cannot describe the conditions under which the company has created etc.
The principal activities carried on by the company during the year and significant changes in those activities. The counting statements
prepared for FRS 3 cannot explain the activities guide by the company or give complete information about new and discounted activities.
Details of recommended dividends. These must be approved by the shareholders of the company at the Annual General Meeting
Natures of the directors of the company their remuneration, pension details, and their interest in the shares and debentures of the
company. Shareholders the entitled to know who has been stewards of the interests during the year and the extent to each director's
commitment to the company as a shareholder or debenture holder
Donations to political parties or charities during the year provided the total of these donations is more than $200. Shareholders may not
wish their money to be used for political purposes or may wish on the other hand that some of the profit be used for charitable purposes.
Details of any significant changes in non-current assets during the financial year. Shareholders are informed of any material differences
between balance sheet values of non-current assets and their market value and their additions and disposals
State how an upward revaluation of an existing non-current acid is recorded in the financial statements of a company
And upward revaluation of an existing non-current acid is credited to a Capital Reserve called a revaluation reserve. It increases the value
of the non-current asset to reflect the true and fair value of the financial position of the business. It reduces the accumulated depreciation
in the statement of financial position. It increases the shareholders' equity and it is recorded in the statement of changes in equity and is
also shown as part of equity in the statement of financial position.
Explain why the company should not use its revaluation reserve to pay dividends to shareholders The revaluation reserve is a Capital
Reserve. This arises when a non-current asset usually land or building is valued upward to reflect an increase in the market value of the
Asset. This increases the shareholder's equity and accounts to reflect the true and fair value of the financial position of the business.
This is an unrealizable gain until the concerned asset is sold so the revaluation reserve cannot be paid out as a cash dividend as no cash is
received on upward revaluation of non-current assets.
State two objectives of financial statements of a limited company
Financial position and solvency through the statement of financial position
Financial performance which is primarily provided in a profit and loss account through the comparison of incomes with expenses
Movements of cashflows through cash flow statement
Changes in equity items including shares, reserve, and profits through the statement of changes in equity
Overall position and prospects which may be very helpful for the use of financial statements in making different solutions.
Suggest two reasons why the balance on a retained earnings account may be lower than the profit of the Year
Loss brought forward from previous years
Payment of ordinary or preference dividends
Bonus issue of shares out of retained earning
Transfer to general reserve
ISSUE OF SHARES AND DEBENTURES
Abdul is considering forming a company by issuing ordinary and preference shares. State one advantage and one disadvantage of
ordinary shares to:
(A) the company (B) shareholder
State one advantage and one disadvantage of preference shares to:
(A) the company (b) A shareholder
ADVANTAGE OF ORDINARY SHARES: Dividends need not be paid if profits are insufficient. Entitled to vote at the AGM/ may on a higher
dividend as profits increase.
DISADVANTAGES OF ORDINARY SHARES: Ordinary shareholders control the company as they have the vote. Ordinary shareholders must
stand and any losses on a winding up/ may not receive any dividend at all if profits are insufficient: the dividend is variable and based on
profits
ADVANTAGES OF PREFERENCE SHARES: An allowance expense for tax purposes if shares are redeemable. Preference shareholders receive
the dividend before ordinary shareholders.
DISADVANTAGES OF PREFERENCE SHARES: No control over the amount of dividend as it is fixed. Do not receive higher dividends in this of
reference dividend is a fixed amount.
Describe three different types of preference shares
redeemable preference shares: Maybe issued by a company with the condition that the amount subscribed may be refunded to the
shareholders at the option of the company.
participating preference shares: Entitle holders not only two a fixed dividend rate but also an additional distribution of profits in good
trading years
non-participating preference shares: Shareholder's right to dividend is ordinarily limited to a specific amount and most preference shares
are non-participating in nature
cumulative preference SHARES: Are entitled to be paid any areas of the dividend before ordinary shares receive any difference whereas
preference shares that do not have this c********* right are called non c*********
State the major differences between ordinary shares preference shares and debentures
Ordinary shares represent ownership whereas preference shares and debentures are debts of the business
Ordinary shareholders have voting rights whereas preference shareholders and debenture holders do not have voting rights
Debentures on interest at a fixed rate preference shares on dividend certificate whereas ordinary shares receive dividends the amount of
which varies from here to here and depends upon profit and company policy
State two differences between ordinary shares and debentures
That dividend on ordinary shares is variable and dependent on the levels of profit so has a higher award when the profits are high
possible involvement of Bombay and Bob in managing the company through voting rights whereas c********* preference shares have a
fixed dividend of 4200 which is profits are low one year will be paid the next so Limited risk
Explain two advantages that a company hopes to gain by using the right tissue in today's additional capital
Control may be retained by existing shareholders as the right issue is made in proportion to existing shareholding
Races cash for the company
Cheaper than a normal share issue because of the flow of administrative and Advertising costs
Keeps reserves available for future dividends
Beneficial for existing shareholders in that the right issue is made at a discount to the current market price
Explain what is meant by your bonus issue and also explain whether it would help the expansion plans for the business
A bonus issue is a free issue of ordinary shares to the existing shareholders in proportion to the present shareholdings. The proposed plan
would result in one new share for each 5 held being given to the present shareholdings. This is simply a bookkeeping exercise and reserve
is debited without receiving any cash on the issue. As a result, it would not help the company in its expansion plans for the business.
State three advantages and one disadvantage to a limited company of making a bonus issue of shares
ADVANTAGES: Bonus issue allows the company to declare a dividend without using up cash
There is no delusion of ownership shares issued in proportion to existing Holdings so shareholders remain satisfied
The cost of issuing Bonus shares is the minimum because no unwitting Commission brokers etc are required
Shareholders need not pay tax on the bonus shares as they pay on cash dividends
Shareholders have an option to convert the shares into cash
DISADVANTAGES: If the rate of dividend fluctuates so that it cannot be maintained the market value of shares may go down
If the rate of profit is not increased the rate of dividend may be decreased
No cash flow arises on bonus issue
Name three types of cash Reserves
Share premium account capital redemption reserve revaluation reserve
What are the general reserves and why are they created in accounting
General reserves are a profit of a company after payment of tax which are not distributed among the shareholders as dividends there is no
specific reason for making these reserves whether they are created to provide for unforeseen emergencies or to strengthen the financial
position of the business.
What explain what is meant by keeping reserves in the most flexible form
This means using capital reserves before revenue reserves to maintain distributed Reserves so that maximum future dividends can be paid
Explain why the company usually leaves the reserves in the most useful form following the issue of the bonus shares
Capital reserves are not flexible as they can only be used for certain purposes that are for meeting capital losses and capital expenses
whereas revenue reserves are more flexible in nature as they can be used for meeting as well as capital expenses and losses so by utilising
the capital reserves for bonus issue revenue reserves will be left a new which can be used more freely in comparison to Capital reserves as
mentioned above.
CASHFLOW STATEMENTS
1. FRS1 requires the preparation of an annual cash flow statement. State two advantages of preparing cash flow statement.
Ans:
a. A cash flow statement has to be prepared by each company as the international accounting standard 1 states that a company must
prepare a statement of cash flows previously known as cash flow statement in edition to other main financial statements.
b. It reconciles profitability and liquidity by explaining the difference between the net income and cash flows and it can be used as the
basis for budgeting and business planning.
c. A cash flow statement can be used to assess the timing, amount and predictability of future cash flows at it can be used as the basis for
budgeting and business planning.
d. Its shows sources and uses of cash in an objective manner. On the other hand, reported net income is heavily influenced by a firms
accounting practices.
e. It shows the ability of a business to generate cash from internal and external sources.
2. Explain the benefits of preparing a cash flow statement in addition to an income statement. Your explanations should include a
comparison of the basis of which they are prepared.
Ans: The cash flow statement sets out the sources and uses of cash (and near cash items) over a period. It is important to recognise that,
while profitability is an essential ingredient of success, it is by no means sufficient. Even though profits may be high, a business may face
liquidity problems. It is because of the fact that income statement is prepared on an accrual and prepayment basis and also contain don't
cash items like depreciation, bad debts etc. Moreover, it contains only revenue items (incomes and expenses) and omits capital items.
While the cash flow statement is prepared on a cash basis and contains only cash items. Moreover, it has both capital and revenue items.
Although cash flow statements as a part of financial statements does not normally provide additional information already provided to
users, rather, it normally provides a selection, b classification and summarization of information already shown in the income statement
and balance sheet. Forming a link between two balance sheets through cash flow statement does this. As we know that income statement
determines the profitability of the business in terms of "profit or loss" which business makes. Balance sheet shows the financial position of
the business as what business owns and what it owns.
Briefly put, depends not so much on profits as on its ability to pay its debts when they fall due. Such payments my include income
statement items (expenses), but also capital payments for new non-current assets and the repayment of loan capital when it falls due eg.
On redemption of debentures.
From these examples, it may be apparent data companies performance and prospects depend not so much on the profits earned in a. but
realistically on liquidity (cash flow). A cash flow statement goes towards meeting this criticism on income statement.
In Indonesian to an income statement and balance sheet cash flow statement assesses reasons for differences between reported profits
and cash flows. It determines whether liquid funds generated air sufficient and weather they have been raised and applied in an
appropriate way. Lastly cash flow statement also shows ways in which financing occurs.
3. Explain why a cash Flow statement is important to shareholders.
Ans: Cash flow statement is intended to show information that is not available from examining the income statement and balance sheet. It
is intended to fill in gaps in the available published information between opening and closing balance sheets. In simple words, cash flow
statement is nothing more than a summary of a company's cash book for the accounting under review. This shows sources and uses of cash
during the year. All though a cash flow statement shows only historical data, it should help shareholders to assess a company ability to:
a. Generate sufficient cash to fund its day-to-day operation.
b. Repay loans as they fall due and make payments of loan interest.
c. Replace an improve non-current assets as necessary.
d. Make the required payments of tax and maintain an acceptable level of dividend.
e. The reason for the difference between profit and cash from operations.
A cashless statement provides information that is both reliable (since the preparation of the statement involves little if any, subjectivity)
and also relevant to the needs of shareholders and many users. The information provided his family is easy to understand and it is
generally agreed that a cash flow statement is what they and useful edition to a company-published account.
4. Explain how cash flow statements differ from cash budgets.
Ans: Cash flow statements are similar to cash budget in the content that they show sources and uses of cash but they are different in many
respects some of which are given below:
a. Cash flow statements are published for external use and they are part of a company's published accounts whereas cash budgets are only
used for internal purposes.
b. Cash flow statement sir based on historical data and shows sources and uses of cash for previous year where as a cash budget shows the
same for a coming period.
c. There is no set format of cash budgets but a cash flow statement has to be prepared in compliance with IAS 7.
d. Cash flow statement show reasons for changes in cash for a whole year where is companies May prepare cash budgets for anytime
period to show changes in cash.
e. A company is bound to prepare a cash flow statement on annual basis whereas there is no such compulsion for a cash budget.
f. A statement of cash flows is prepared for a specific. Cash budget is usually presented in columnar format for more than one time period.
5. Explain the difference between cash and profit.
Ans: Cash is the actual amount of money physically held by a business. Whereas profit is calculated as excess of incomes over expenses and
does not represent actual amount of money.
6. Explain why instant has an overdraft at the end of 2012, despite making a profit for the year.
Ans: The reasons for having and overdraft at the end of 2012, despite making up profit for the year are given below:
* Purchase of new non-current assets for $200 000
* Repayment of loan amounting to $150 000
* Cash drawing amounting to $400 000

BUSINESS FINANCING
1. The company needs to improve its premises but the bank refuses either to allow a further increase in overdraft or to grant a loan.
State 6 other possible sources of finance.
Ans:
# further investment by the owner
# borrowing from other banks
# personal borrowing from friends, relatives
# buying on hire purchase.
# buying on finance lease.
# mortgage
2. In May 2003 the directors of Omicron Limited plan to build an additional factory. This request initial capital expenditure of $ 600 000
and his expected to start producing revenue and be profitable in 3 years. The detectors are considering racing the additional funds for
the project by one of the following methods.
i the issue of 12% debentures 2006/2008 at par.
ii A rights issue of ordinary shares at $4 per share.
iii an issue of ordinary shares to the public at $4 per share.
The present table of ordinary dividend will be maintained on all the old and new shares for the foreseeable future. Discuss each of the
methods of raising capital, and state with reasons for which method the directors should choose.
Ans:
i debentures are long-term loans and it can be redeemed on or before a specified date, which is shown as a part of its description.
Debenture holders are not owners of the company in the same way as is shareholders are. Debenture interest of $ 72,000 ($ 600,000 x
12%) is an allowable expense for tax purposes. If companies make huge profits additional profit after pain debentures holders at a fixed
rate will be available for ordinary shareholders.
ii in the right issue, yes sir offer to existing shareholders, to the general public, issue 150 000 shares, required additional capital would be
raised. The offer price of the rights issue is usually advantageous to the shareholders and the company saves the expense and
inconvenience of preparing a full prospectus for a public issue. Another advantage of a right issue is control of the company remains with
the existing shareholders however the dividend of $60 000 (if proposed at present rate) is not an allowable expense for tax purposes.
iii an issue of ordinary shares is a more permanent form of capital than other forms. If the shares are offered to the public generally then
they may result in loss of control of existing shareholders on company management. Dividend paid to them is not an allowable expense for
tax purposes; however, payment of dividends is not binding for companies as the payment of interest. A public issue may be more
successful than a right issue. Issuing of shares will not increase gearing.
Based on the above discussion, the rights issue seems to be more advantageous for the company edit ensures control of the company
remains with the existing shareholders and may also result in increased existing shareholders' commitment and loyalty towards the
company.
3. 5% debentures are due for repayment in the next - years the directors of bayliss Limited or considering the fall saying to options to
raise the necessary finance to repair the $80,000.
I. Issue 160000 ordinary shares of$0.50 each.
II. Ishwar father debenture of $80,000. Required I. Discuss the impact of each option on the future profits of bayliss Limited. II.
Advisory directors which option there should choose full stop give reasons for your decision.
Ans:
I. And issue of ordinary shares is a more permanent form of capital then other forms. If the shares are offer to public generally then they
may result in loss of control of existing shareholders on companies management. Dividend Pate to them is not an allowable expense for tax
proposers, payment of dividend is not binding for companies as the payment of interest. A public issue may be more successful than a
rights issue.
II. As debentures are a long-term loan and it can be redeemed on or before a specified date which is shown as part of its description.
Debentures holders are not - of the company same way as share older chart debenture interest of $72,000 ($600,000 x 12%) isn't available
expense for tax purposes serious if company makes huge profits, additional profit after paying debenture holders at an fixed rate will be
available for ordinary shareholders.
III. based on above discussion, the issue of ordinary shares seems to be more advantageous for the company as it ensures control of
company remains with the existing shareholders and dividend is only if the company makes a profit and also defense upon the dividend
policy of directors.
4. Patel wishes to expand his business and is and decided about taking outer five year loan or asking the bank for an overdraft.
Required. State one advantage and one disadvantage of each option.
Ans: 5 year loan
Advantage :
Fix rate of interest
Helps to plan cash flow in a better way
Will be available for a long period
Disadvantage :
Interest payable for whole period
Maybe secured on assets
Bank overdraft
Advantage :
No interest is charged if not used
Can be paid of whenever business prefers
Disadvantage :
Higher rate of interest then loan
Can be called in by the bank at anytime
5. The partnership has recently purchased near premises and needs new equipment coating over $100,000.
Required
Identify two methods of missing extra Finance and state one advantage and one disadvantage of each method.
Ans: I. Non-current borrowing from Bank
Advantage: It will provide ease working capital conditions and business can plan for the future as the
repayment of such following can be done over a longer. Moreover, manish will keep all future profit earned. Disadvantage: High rate of
interest. II. Additional capital by partners.Advantage: No outside is influence on the business and interest payment can be saved.
Disadvantage: Capital is limited to personal resources.
III. Admission of a new partner
Advantage: It will bring in additional expertise and will provide ease in working load
Disadvantage: Reduction in future profit shares of Manish as he will lose 10% of profits earned.

6. The directors of a company want to raise finance to use during 2013.

Their options are:
I. To take out a loan repayable over 5 years with interest at 6% per annum
Or II. To make a rice issue of one ordinary share for every two shares held, at a 5% discount on the current market price.
Required. Explain one disadvantage of each of the possible methods of raising the finance.
Ans: On loans, fixed amount of interest has to be paid e respective of profit or loss made by the company. In addition, if The Loan is
secured on non-current assets, then these assets cannot be sold unless loan is being paid off.
Rights issue usually results in reduction in market value of shares. It is possible that all shareholders do not take up their rights and as a
result required funds could not be raised.
question 7(1) the directors of a limited company wish to raise funds to expand the business. State two sources of finance they could
use. (2) state the advantages and disadvantages of the company of the two sources of finance you have chosen.
ans (1) Ordinary Shares, Preference shares, long term loans, disposal of non current assets no longer used.
ans(2) ordinary shares
advantages: the company does not have to pay a dividend if profits are low. dividends vary with profits
disadvantages: ordinary shareholders have a vote at Annual General meetings in a private company they can change the balance of control
Preference shares
advantages: Shareholders have no right to vote at AGM. The dividends are fixed
disadvantages: Low or no profits, dividends may have to be paid or provided
Debenture/ Long term loan
advantages: fixed rates of interest, repayment date known
disadvantages: Interest needs to be paid even if no profit made, security may be required by the lender
8 1) discuss two possible sources of finance which could be used to fund the purchase of the additional non current asset in a
partnership
2) recommend the most appropriate source of finance for the partnership. Justify your answer
Ans : 1) non current borrowing from Bank
advantage: it will provide ease in working capital condition and the business can plan for the future as the repayment of such boring can be
done over a longer period.
disadvantage: high rate of interest
2) additional capital by partners
advantage: no outside's influence on the business and interest payments can be saved
disadvantage: capital is limited to personal resources
3) admission of a new partner
advantage: it will provide ease in working load
disadvantage: reduction in future profit shares of the existing partners
Injection of additional capital by partner seems to be most appropriate source of finance for the partnership as it doesn't need to be rebate
moreover no outside as influence on the business and interest payment can be saved
9 A club wishes to buy a new boat for use by members. 12500
d) suggest three ways the number could raise the finance to purchase the new boat.
e) State one advantage and one disadvantage of each method you have suggested.
ANS: 1) use of funds from the deposit account
advantage: immediate availability of funds.
Disadvantages: No cash reserves will be left income on deposit will be lost
2) bank loan
advantage: funds available from a bank for full amount
disadvantage: Bank loans usually request security. Interest will have to be paid.
3)Ask members for donations
advantage: no fixed increase charges.
disadvantage:may not generate required funds so some other source maybe required.
4) Fund raising events
advantage: no fixed interest charges
disadvantage: May not generate required funds so some other source maybe required.
10. A club is considering modernizing the pavilion which will cost 75000
1) compare and contrast two sources of finance which the club could use
2) advise the club members which source of finance will be most appropriate. justify your answer
ANS: 1) fund raising events
advantage: no fixed charges.
disadvantages: May not Generate required funds so some other source maybe required.
2) Bank deposit and bank loan
advantage: funds available from bank for full amount.
disadvantage: Loans usually require security. interest will have to be paid.
3) sponsorship
advantage: no fixed interest charges
disadvantage: may not generate required funds so some other source may be required.
A combination of the above sources maybe more beneficial for the clap. I am raising events responsive ships maybe arranged in case the
sources do not generate required funds then bank balance may be used. Still some deficiency then alone maybe arranged.
11. Bankers and co dot Limited wants to purchase an additional machine to complete for the orders. Doing so have been discussed give
one advantage and one disadvantage of each method
1) rights issue
2) issue of shares to the public
3) issue of debentures
ANS: 1)right issue
advantage: control ON company's affairs remains with the existing shareholders.
disadvantage: Dividend paid to them is not an allowable expense for text purposes. A dilution in the list price of the ordinary shares may
occur.
2)Issue of shares to public
advantage: control not being lost or transferred to debenture holders.
Disadvantage: management control cannot be with the existing shareholders.
3)Issue of debenture
advantage: debenture interest is an allowable expense for tax purpose.
disadvantage: Interest has to be paid whether or not company makes a profit.
Question 12. Sanghira manufacturing PLC produces office desk in two versions standard and superior. Up sangrah manufacturing PLC
wish to raise additional finance for investment identify two possible sources of finance the directors could use an explain one advantage
and one did disadvantage of each method you chosen
ANS: public issue of shares, right issue, debenture issue, bank loan, disposal of surplus non current assets, debt factorising
1) public issue
advantages: reduce gearing level
no legal obligation to pay dividend in the years of low or no profitability
disadvantages: Expensive
needs underwriting to ensure success
dilutes control of existing owners
2) right issue
advantages: no delusion of control of existing on owners
generally cheaper
no legal necessity to pay dividend in a bad year
enjoy your voting rights
3) debenture issue
advantages: charging of interest against property which is admissible expense for text purposes
trading on equity
disadvantages: needs to be redeemed(repaid)
interest always payable regardless of profitability
no voting rights and General Meeting
may require security or floating charge
14. Your friend Brian has just inherited 10000 and would like to invest in frame battle PLC he is undesited whether to invest in ordinary
shares the current market price is 1.7 in 7 by 14% debentures that can be purchased at power value discuss the merits and
disadvantages of two investments in frame Petal PLC and advice Brian which one to choose give reasons for your choice
Investment in ordinary shares of Frame Patel PLC will give Brian ownership rights, as after becoming ordinary shareholder he will be
entitled to attend and cast his vote in general meetings of the company.
If the company makes large profits, then Bryan will have a chance to be rewarded in the form of higher dividends, greater capital growth
with ordinary shares.
Investment in debentures: the fixed interest rate offered on debentures to Brian is higher than the dividend yield presently earned on
ordinary shares.
The debentures are safer investment for Brian as debenture holders have a higher priority for getting the repayment of their investment if
a company is liquidated than preference shareholders and ordinary shareholders.
Moreover dividends on ordinary and preference shares cannot be paid unless the fixed interest on debenture is provided for.
Interest on the debentures must be paid whether the company makes a profit or a loss.
Debenture interest is an allowable expense for tax purposes.
If a company makes huge profits, additional profit after paying debenture holders at a fixed rate will be available for ordinary shares.
The issue of debentures will increase the gearing ratio.
Needs to be redeemed after the agreed time period.
ACCOUNTS FOR NON PROFIT ORGANISATION
1.Explain three differences between the financial statements of a ngo and the financial statements of a public limited company
Public limited company: prepares income statement. Excess of the total income over total expenses is called profit. Excess of total
expenses over total income is called loss. Shows share capital and reserves. Financial statements are published and available for general
view. Prepares statement of cash flows.
Non-profit organisations: prepares incoming expenditure accounts. Excess of total income over expenses is called surplus. Excess of total
expenses over Income is called a deficit. Shows accumulated funds. Financial statements are not published. Prepare receipts and payments
account
2. Distinguish between the terms capital and accumulated fund In a trading organisation the term capital is used to represent the amount
invested by owner within the business. As there are no owners in a non profit organisation, accumulated fund replaces capital in this case
and represents the accumulation of surpluses over a number of years. Drawings by a sole trader reduce his capital but as there is no owner
in a non profit organisation so accumulated fund is not affected by drawings. Capital increases through profits and reduces by losses and
drawing. Surpluses are added in accumulated funds and deficits of subtracted.
In a trading organisation, what are the equivalents of the receipts and payments account and accumulated fund in a non profit making
organization. Cash book is equivalents to receipts and payment account and capital is equivalent to accumulated fund in profit making
organisation
State the main difference between the circulars and income and expenditure account and the profit and income statement profit is
available for distribution among the owners whereas as surplus relates to nonprofit organisations cannot be distributed among its
members
5 distinguish between receives and payments account and income and expenditure account. In general, Receipts and Payments account
may be called an abridged cash book as all the cash transactions of the whole year are recorded in it in a summarised form. On the other
hand the Income and Expenditure account may be linked with the income statement of the business concern. The major difference
between the two accounts are: receipts and payments account begins with an opening and end with a closing balance of cash and
bank( though sometimes they are merged). There is no opening or closing balance in the income and expenditure account. Hovewer it
ends with a surplus or a deficit of the period concerned.
R and P account records all amounts received or paid whether related to capital or revenue items. I and E accounts includes revenue items
only.
R and P account include cash items only. I and E account non cash incomes or expenses that are of revenue nature.
6 state to advantages and two disadvantages of using a receipts in payments account instead of an income and expenditure account in a
non trading organisation
Advantages: it provides the summary of cash transactions for a financial period. It shows the cash position at the start and at the end of the
accounting. Easy to maintain and understand.
Disadvantages; it includes all capital and revenue receipts and payments which are not separated. It ignores the fact that there may be
many receives or payments which are of capital nature or related or two preceding or coming years. it ignores noncash items example
depreciation or subscription written off etc. it shows no records of assets and liabilities other than the cash or bank balances
7 state 3 reasons why for most clubs are receives and payments account is not always a satisfactory record of the club’s activities
Provision of only Receipts and Payments account to members can be unsatisfactory for the members as it includes all capital and revenue
receipts and payments but ignores the fact that their maybe many receipts or payments which are of capital nature or related to preceding
or coming years. Moreover, it also ignores non-cash items examples so to show the performance of the business for a particular income
and expenditure should be provided to the members. Lastly the receipts and payments account shows no records of asse and liabilities
other than the bank
8) State two methods of treating donations received by the club. Donations may be treated as income in income and expenditure
account. Alternatively it may also be shown as a special fund in a balance sheet.
9 Explain why a club may Capitalise on donations received from its member
As donations are not received on a regular basis and their amounts vary from year to year so clubs capitalise the donation account. In
addition, donations may be treated as income in the income and expenditures account. However, if donation is received for specific
purpose then it may be shown as a special fund in the balance sheet
10 state three differences between a donation and a member substitution received by a non profit organisation.
Donation: voluntary basis( not for binding on donor). maybe from both members and non members. irregular payment maybe for a
specific purpose eg buy new equipment. Can be capitalised.
Member subscription: Members obligation. from members only. regular payment that is monthly or annually. for daily running of the
organisation. only treated as a revenue item income acc. Cannot be capitalised.
11 discuss whether or not the Treasure is she invest the fund donated amount for the Clubhouse in the separate long term savings
account justify your answer As donation is received for a specific long term purpose so should be invested in long term savings account.
This investment will create a source of income for the organisation. It would diversify the income of the organisation and reduce its
dependency on conventional earning sources. The interest on long term savings account may help to ‘smooth out’ the overall income
stream.
12 the Treasure had suggested increasing Cafe prises and the rate of lifetime subscription but the club committee refused to do this.
Instead the committee decided to raise the ordinary substitution by 50%. Suggest three additional ways in which the club tries to
minimise or eliminate the deficit in future years. Increase in annual subscription or reduce the annual subscription charge to attract more
pretential members. use club house extensively for social events and other functions. parking fee maybe introduced. life subscriptions may
be encouraged
13 state two reasons why the members of a non profit organisation do not receive a dividend. Non profit organisation is a legal entity
which nobody owns. It has trustees or members who run the organisation but cannot sell that trusteesship or membership. It is not
allowed to distribute profits to anyone no matter how much money it makes. In this organisations 100% of the money earned is reinvested
in the organization to finance the main cause of the organization.
14 explain why the club transfer life membership income and expenditure account over 10 years. In the case of life membership the
members are generally required to make only one payment in a lump sum which enables them to become the members for whole of their
life. As life membership fees is a substitute for ‘annual membership fees’, therefore, it is debited to the bank account and credited to a
separate life fee fund and fair proportion be credited to income in subsequent years as the organization is supposed to provide
membership facilities for the rest of their lives. This treatment is also in compliance with the matching concept. The life fee should be
spread over a suitable period for which the club is expecting to provide services to the life members. The suitable period may be
determined by dividing the life fee by the annual membership fee
11 Gurmukh, a retired gentleman, is considering joining the club and seeks your advice on whether or not he should pay an annual
subscription or a life membership. advice Gurmukh whether or not he should become a life member justify your answer.
If Gurmukh has 1000 to pay life fee he would be required to pay the membership fee again and his life irrespective of changes in annual
membership rates. As Gurmukh is a retired personnel so it can only benefit him on the financial ground if he lives for a period of more than
a year. Clubs usually offer special benefits for life members which could also be there. However, the life fee, once paid is not recoverable or
refundable. Based on above discussion, Gurmukh may become like member if he has ample funds like a thousand dollar and his health
conditions are good
INTERNATIONAL ACCOUNTING STANDARDS
1.Advise the directors weather or not this you reply the International accounting standards when preparing the published accounts
justify your answer
The IAS should be applied by the directors as the offer the following benefits: they reduce the confusing variations in the accounting
treatments while preparing financial statements. They describe the accounting principles, the valuation techniques and the method of
applying accounting principles so to ensure true and fair value view. Where important information is not statutorily required, IAS call for its
disclosure. IAS facilitate comparison of financial statements of companies in the same industry situated in different parts of the world. IAS
help in resolving conflict of financial interest among various stakeholders. IAS help the auditors in case of preparation of financial
statements and any deviation can be disclosed in the reports so that uses deviations.
2. State have proposed final dividend should be dealt with in the accounts
Under IAS 1 the final dividend is not accounted for in the financial statements unless it is approved by the ordinary shareholders in the
Annual General meetings. It is however disclosed as a note to the accounts as nonadjusting event. This is included in the next year's
financial statement.
4. Limited adopted the AVCO method to value inventories in 2016. The purchase price has been increasing over recent years. The
directors are now considering to during changing FIFO method to value the inventory in 2017. Advice to directors whether or not the
method of valuing inventory should be changed. IAS 2 allows both FIFA and AVCO to value inventories. The business should however
select the that method which gives more relevant and reliable information about the state of the transaction. Consistency concept requires
that accounting methods once chosen should be used with consistency. The business may however are allowed to change the method if it
requirement of a change in the IAS or change is expected to provide more relevant information about the effects of the transactions as per
IAS 7. The director should not change to AVCO to have a higher inventory value is therefore a higher gross profit.
5. The first audit report was qualified. Included in current assets was inventory value that cost price of $1 million. This has become
damaged and could only be sold for 750000 lakh after costs of 20000. Explain concerning the relevant IAS the necessary adjustment that
must be made to the financial statement. As per IAS 2, inventory must be valued at lower of cost and net realisable value. This treatment
avoid overstatement of inventory and helps to recognise the loss of reduction in an inventory’s value as soon as it arises. Net realisable
value is the estimated selling price less cost to make the inventory ready for sale. first sale the cost of inventory is 1 million where is net
real value is only 550, this requires reduction in the value of inventory by 450000 this assessment will result in reduction of reported profits
by 4 f50000 in the income statement inventory value in the balance sheet should be reduced by the same amount to show a true and fair
view
6 IAS 10 events after the statement of financial position date identify two types of the event as adjusting and nonadjusting. state the
difference between adjusting and nonadjusting events. explain the treatment in the financial statement.
Adjusting events refer to situations where events after the SOFP date provide new evidence of conditions that exist at the SOFP date, and
result in adjustment to the financial statements.
Non Adjusting events: represents events interesting that are indictive of conditions that arose after the SOFP date as a result this should be
reflected in the financial statements of the following accounting, but not adjusted for in financial statement of the current accounting
period. However it is considered that these events are relevant and material and that users of the financial statements need the
information for making economic decisions, these events can be disclosed in notes to the account. Otherwise users of financial statements
would be deprived of material information.
7. Explain the treatment in the financial statement of the year ended 31st December 2016 of the purchase of the second factory on 7
January 2017. This is a nonadjusting event as its condition did not exist at the reporting date (date of SOFP). It will be disclosed by a way of
the note to the financial statements.However, it will be recorded in the following year's accounts.
8. State the IAS which deals with property plant in equipment and identify items which of company can add to the cost price of an asset
IAS 16 deals with property plants and equipment. The items which a company can add to the cost price of an asset may include import
duty, installation cost, delivery charges, handling charges, inspection, and testing costs, delivery and handling costs.
8.equipment operates in a factory which the company recently bill paid the factory for non current asset includes the amounts page to
the seller of the land the supply of the building materials and the building contractor who supplied the labour. Name one additional
cost involved in building the factory which is included in the non current assets legal cost, commission of property agent, architect’s fees
12 IAS 36 sets out the accounting procedures to ensure that assets are carried on the statement of financial position at no more than
the recoverable amount. explain the accounting treatment to ensure that is achieved. When the carrying amount of an asset is more
than its recoverable amount then it has to be reduced to its recoverable amount. This reduction in the asset’s values is called the
impairment loss. It is recorded as an expense in the income statement. Once impairment loss is recognized the asset should be valued in
the balance sheet at its recoverable value.
13 Suggest two possible reasons for impairment loss. Name the IAS which deals with impairment loss. Reasons: Decline in market value.
Increases in market interest rates. Obsolescence or physical damage. Negative changes in technology, market. economy or law. IAS 36
14. Explain the term impairment with reference to IAS 36 when the carrying amount of an asset is more than the recoverable amount
then it has to be reduced to the recoverable amount. The recovarable amount is the higher of fair value less costs and the value in use. This
reduction in the value of the asset is the impairment loss and is recorded is an expense in the income statement. Once the impairment loss
is recognized the asset should be valued in the balance sheet at its recoverable amount
15. Aston is considering investing in a limited company he does not understand some of the accounting terminology: provision,
contingent liability, contingent asset. A provision is a liability of uncertain timing and amount. A contingent liability is a possible liability
which arises from a past event whose existence will be confirmed by the occurrence or not occurrence of an uncertain future not wholly
within the control of the business. A contingent asset is a possible asset from a past event whose existence will be confirmed by the
occurrence or non-occurrence of an uncertain event
16. the directors of Rizwan Limited expect that the value of the Goodwill acquired from Neemrana reduce over a period of years.
Explain, referring IAS 36 and 38 how any reduction will be calculated and state the accounting adjustments that will be made in future
financial statements. As the goodwill arises on purchase of business so under IAS 38 intangible assets Rizwan Limited can show it as an
intangible non-current asset in the statement of financial position. Rizwan must then amortize the Goodwill on the straight line basis over
the estimated useful life of goodwill. This is done by transferring and equal charge from Goodwill to income statement. This amortization
period should be reviewed annually and changes made in the amortization in line with this review. Under IAS 36 (Impairment of assets)
each year Rezwan should also compare the carrying value of the Goodwill (that is its netbook value after amortization) with its recoverable
amount (it's value in use). If the recoverable amount is less than the carrying value then the impairment loss is shown as an additional
expense in the incomes statement.
17. explain why the goodwill may increase in the SOFP of a limited company. Under International Financial Reporting Standards(IFRS),
only purchased goodwill can be shown in the financial statement. The increase in the value of goodwill therefore represents goodwill
arising from the purchase of another business.
18. The directors of a Limited company have discovered the following: inventories have all been valued at cost 73100 on 30th
September 2015 included in this valuation a sum items which originally cost 6000 but have damaged. Normally sell for 10000. Could be
repaired cost of 3000 and then sold for 6500. Second, on 13th October 2015 a flood resulted in the loss of inventory value at 17500. 3
the directors proposed the final dividend of 0.05 per share. no dividends for paid during the year. Explain your treatment of the points
listed above 1. as per the IAS 2 inventory is valued at lower of cost and net realizable value. this is to comply with prudence and matching
concepts. this treatment avoids overstatement of inventory and helps to recognize the loss of reduction in the inventory value as soon as it
arises. The flood Orchid on 13th October after the date of the financial statement on 30th September when no condition existed relating to
the fire event. Then this is not an adjusting event and should be disclosed as a note without making any adjustment in the financial
statements. Post dividend unless approved by the shareholders is treated as a nonadjusting event under IAS 10. it is provided as notes but
not shown within the financial statements
AUDITING
Question 1. List 5 duties which the auditor would carry out during an audit.
Answer: Appointed to act as an independent check on the reliability of the companies accounting records. The auditors are required to
carry out their duties objectively.
*They should inquire of Management and others to gain an understanding of the organisation itself, it's operations, financial reporting and
known fraud or error.
*They must ensure that the accounts comply with the current accounting standards and the requirements of Companies Act 2007.
*They should perform analytical procedures on expected or unexpected variances in account balances or classes of transactions.
* They should check documentation supporting account balances or classes of transactions.
*The observe the physical inventory count.
* The overriding requirement is that auditors must ensure that the accounts present a true and fair picture of the company’s financial
affairs and that they are free from significant errors.
*The auditors are required to to report to shareholders as part of the annual report giving the judgement as to whether or not the financial
statements meet this criteria.
*At the completion of the audit, the auditor may also offer objective advice for improving financial reporting and internal controls to
maximize a company's performance and efficiency.
Question 2 state 3 characteristics of an audit report.
Answer: A report to shareholders, prepared by an independent person, prepared by a suitably qualified person, prepared following an
infection of the companies books, contains the auditor's stated opinion as to whether the financial statements give a true and fair view
Question 3 Assess the effect that audit report will have on shareholders
Answer: Shareholders will know that they cannot relay on the financial statements as they do not give a true and fair view. they will know
that the statement of financial position does not show the true Assets and liabilities of the company. they will know that the underline
share value is lower than the previously thought. the market value of the shares may fall. potential investors and likely to be deterred from
investing. shareholders may not have the required knowledge of auditing and Audit reports and they may not care. The may simply be
interested in the dividends the company pays. Shareholders may question whether the qualification of the audit report is result of
disagreement between the directors and auditors
Question 4. How can one and sure the financial statement true and fare view to the companies financial affairs. Analyse the importance
to the shareholders of the audit is providing a true and fare view of the companies accounts 6 marks
Answer: The phrase true and fare view in auditing refers to the auditor's opinion regarding the quality of information given in financial
statement. ‘Fair’ in this context implies that the financial statements that free from material misstatements and ‘true’ entails true
representation of the performance and financial position of the business. They are also important for tax computations, for management
decisions and quotations from leading Institutions. Thus it can be clearly seen why independence and objectivity are important in the
statements. This can be linked back to the 4 basic concepts on presenting this information, Going Concern, accrual consistency and
prudence. However true and fair view is not a guarantee but an opinion.
Question 5 explain what is meant by a qualified audit report.
Answer: A qualified audit report is issued after an audit is done by a professional auditor that suggests that misstatements (that is non
compliance with accounting standards or accounting Principles, misstatements in account balances and disclosures), individually or in
aggregate are material but not pervasive, to the financial statements. Auditors who deem audits as qualified opinions are safeguarding the
shareholders’ interest by advising them that the information within the audit is not complete or the accounting methods used by the
company do not follow IAS.
Question 6. The audit report was signed by Amit the brother of the finance director of S Limited. Aamir was un unqualified auditor.
Evaluate the validity of this audit report.
Answer: The auditors’ responsibility is to express an independent opinion on financial statements. Independence of the internal auditor
means independence from parties whose interests might be harmed by the results of an audit. As Aamir is the brother of the finance
director of S Limited and in addition to he was an unqualified auditors so, the audit report signed by him will not be valid. Therefore the
company must appoint a new qualified and independent auditor.
Question 7. Explain the term stewardship
Stewardship is the careful and responsible management of something entrusted to one’s care such as an organisation or property.
Question 8. Explain what is meant by stewardship with regard to the role of the directors
Answer: The directors act as stewards on behalf of the shareholders. They are responsible for ensuring that the resources of the company
and managed to the best effect on behalf of the shareholders and that they can accomplish the shareholder’s interests. To this end the
directors are responsible for ensuring that proper books of account are prepared and that an annual report is published including financial
statements which present the true and fair picture of the company's affairs. The law also requires directors to include a report on the
management of the company as part of the report.
Question 9. Explain the purpose of an end of year audit
Answer: A financial statement audit is the examination of an entity’s financial statements and accompanying disclosures by an independent
auditor. The result of this examination is a report by the auditor, attesting to the fairness of the presentation of the financial statements
and related disclosures. The auditor’s report must accompany the financial statements when they are issued to the intended recepents.
Question 10 Jack, Julia's brother is a sole trader of a small business. He has asked his sister if his accounts should be audited. Discuss the
advantages and disadvantages to Jack of having his accounts audited.
Advantages:
*Audited accounts are readily accepted by the Government authorities like tax authorities and banks.
*By auditing the accounts, errors and frauds can be detected and rectified in time.
* Audited accounts are not a lot more reliable than the accounts which have not been audited.
*For accessing finance from Financial Institutions like banks, previous years auditor accounts are evaluated for determining repayment
capability.
* Regular audits of accounts create fear among the employees in the accounts department and exercise a great model influence on clients
staff thereby restraining them from committing fraud and errors.
* In the event of loss of property by fire or on happening of the event insured against, audited accounts help in the early settlement of
claims from the insurance company.
*To determine the value of the business in the event of purchase or sales of the business, audited account will be treated as the base for
the evaluation.
Disadvantages:
*The payment of audit fees brings an extra cost burden to the organisation.
*During an audit, the auditor requires the attention several company staff and therefore causes destruction.
*An audit does not assure the future viability of the organization audited.
* An audit does not ensure the effectiveness and efficiency of Management.
* Auditors express opinion and therefor does not give total assurance of the true and fair presentation of annual reports.
Question 11. Explain why the audit report of a limited company is addressed to the company’s shareholders and not its directors.
Answer: As auditors are appointed by shareholders at the Annual General Meeting (AGM) so they are required to work to serve the
requirements of the shareholders and not the directors.
Question 12. State three points covered in a director’s report
Companies are also required to publish a director’s report in addition to other fundamental statements. Director’s report is prepared to
supplement the information given in the financial statements. The publication of the director’s report helps the users of the financial
statements to form an assessment of the past and future performance of the business. The report usually contains:
*Names of the persons who were directors of the company at the time during the last financial year.
*Principle activities of the company during the year and significant changes in those activities.
* The amounts of dividends recommended by the directors.
*A fair review of the company's business to help shareholders assess the performance of the directors during the current year.
*The principal risks and problems that the company is and will be facing.
*A report on the position of the company’s business in the year-end.
*The main factor and trend that are likely to affect the future performance and the positions of the company's operations.
* Information about any policies of the company relating to environmental issues, company’s employees, and social issues.
*Additional explanations relating to the amounts included in the financial statements and a statement that all necessary communication
between directors and the auditors was undertaken and none of them are unaware of any relevant audit information.
Question 13. Differentiate between the duties of Management and auditors
Answer:
Management Auditors
Manangement’s responsibility is to prepare financial stantement The auditors responsibility is to express an independent
It is the duty of the management to adopt and maintain strong and opinions on these statements
sound accounting system and internal control. The auditor’s duty is limited to point out material flaws
The management ahs direct access and control on the details of accounting significant deficiencies and gaps in controls observed by
transactions, assets, liability and equity items, them during audit process.
Management is responsible for ensuring the true and fair presentation of The auditor’s knowledge and control on the detail of
financial statements as required in the Companies Act and IAS. accounting transactions is limited to that acquired in and
needed for audit purpose.
They can only make draft or suggest improvements
regarding the form/content of the statements
RATIO ANALYSIS
Question 1 explain what is meant by the gearing of a company and how it may affect the ordinary shareholders.
Answer. Gearing is the proportion of the company's long term funds which have been provided by lenders. There are several ways to
calculate this but a frequently used method of its calculation is as follows: Gearing ratio = (preference share capital + long-term loans or
debentures)/ all share capitals and reserves + long term loan. A company with more loans and preference shares is known as high heard
company and represents a risky investment for the ordinary shareholders. In good years they get very healthy returns but in a difficult year
they may not get dividends as they receive only residual of profits after payments of interest and preference dividends. Furthermore is
company liquidates there may be insufficient funds to repay the ordinary shareholders after the loans and preference shares have been
paid and visa versa for the ordinary shareholders in low geared companies.
Question 3. Suggest three ways Reema could improve his working capital cycle and reduce his bank the overdraft
Answer:
*Improved (strict) credit terms for credit customers.
*Negotiate more relaxed credit terms from the credit suppliers
*Use of debt factoring
*Reduction in inventory levels
*Sale of surplus non-current assets (if any take)
*Take additional bank loan term
*Additional capital invested by the owner
* Reduction in owner’s drawings
use of ratio analysis. Ratio helps in analysing the performance trends over a long period of time.
They also help a business compare the financial results to those of competitors. Ratio this is the management and decision making. Find
out problem and weak areas along with the strength areas. Gracious help to develop relationship between different financial statement
items. The advantage of controlling for differences in size. for maybe quite different in size but can be comparing terms of profitability
liquidity extra. The use of ratios. Ratio analysis. Babu mechanism to certain strengths and weaknesses in the operations and financial
position of an enterprise. how certain limitations which should be kept in mind while making the analysis. Limitations are still below.
Message requires a propose proper compressing that is a ratio is of no use unless it is compared to last years or other forms figures etc.
Last years or with competitors navel resultant destination distortion and invalid comparisons because forms can use different accounting
policies in methods. She is a based on historical figures not justice for inflations in the conclusion drawn from the maybe misleading and
unrealistic. Usually retrospective based on previous performance and condition prevailing in the past. Not necessarily be valid for making
forward projections. When is example conditions of National World economic and a factories. Economic Down Down retailers are usually
the first two suffer where is manufacturers feels the effects later. Rishi and reliability of ratios depend upon the quality of the information
which has been recorded in the financial statement. more is limited to information having monetary value. Only indicators they should not
be taken as final record as final regarding good or bad financial position of the business.. moreover they do not indicate the reasons of
poor performance. Ratios have to be interpreted as the causes of changes in ratios are not revealed and different people may different the
ratios in different ways the sophistication in the use is dependent upon the personal skill experience in judgemental power of the analyst.
Different standards for different ratios to be adhered to.
Uses of financial ratios
Bankers and lenders
Class of ratio profitability liquidity and investment.
Reason for the interest interested and servicing of the loans by the enterprise that is regular payment of interest and be payment of
principal amount on scheduled dates.
Investors
Class of ratio profitability and investment
Reason for the interest their profitability and safety of the investment in would like to know whether the business profitable has growth
potential and his progressing on sound lines
Government
Class of ratio profitability
Reason for the interest government mayuse profit as a basis for taxation grands and subsidies
Employees
Class of ratio profitability liquidity and activity
Reason for the interest employees will be concerned with job security bonus and continuous of Business and wage bargaining
Customers
Class of ratio liquidity
Reason for the interest in the short term and continue to supply
Suppliers
Class clash of ratio liquidity
Reason for the interest interesting and receiving the payments as in when become due and would like to know its ability to honor it's short
term commitments
Management
Class of ratio profitability liquidity and activity
Reason for the interest management is interested in all aspects that is both financial performance and financial condition of the business
Earnings per share(EPS) are the earnings returned on the initial investment amount. For share is generally considered to be the single most
important variation in determining a share price. A major component of the price to earnings valuation ratio.
An important aspect of EPS that offers ignored is the capital that is required to generate the earnings (net income) in the calculation. Two
companies could generate the same EPS number but one could to show with less equity investment that company would be more efficient
at using its capital to generate income and all other things being equal would be a 'better' company.
Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number it is important not to rely on
anyone financial measures, but to use it in conjunction with other measures.
Dividend per share(DPS) is the total dividends paid out over and interior (including....... And final dividends but not including special
dividends) divided by the number of outstanding ordinary shares issued. Special dividend sir dividends which are only expected to be
issued ones so are not included. Pers (dPS) is a simple and intuitive number.
It is the amount of the dividend that shareholders have (or....) receipt for each share they own. Dividend per share is also used to calculate
the dividend yeild ratio .
This is an important ratio as most companies avoid dividend cuts unless their financial condition demands it or there has been...... Other
change in the business or it's capital............ As a result of......, having growing dividend per share can be a sign that the companies
management believes that the growth can be restrained.
Ordinary shareholders prefer high dividend per share as that is taken to be a sign that the management is confident that the high level of
dividends can be maintained or improved on. This results in higher divide yield but lower dividend cover.
Dividend yeild ratio
On like preference shares, there is no stipulated dividend for ordinary shares. Dividend spread to holders of ordinary shares are said by
management, usually and relation to the companies earnings. There is no guarantee that future dividends will match pass dividends or
even be paid at all. Historically, a higher dividend yield has been considered to be desirable among investors.
A high dividend yield can be considered to be evidence that a share is under priced or that the company has fallen on hard times and
future dividends will not be as high as previous once. Similarly a low dividend yield can be considered evidence that the share is over
priced or that future dividends might be higher.
The dividend yield tells the investor how much he is earning on an ordinary share from the dividend along best on the current market
price.
Dividend cover
The ratio measures that how many times the ordinary dividends could have been paid out of the available profit. This shows the like hood
that the company can continue paying the current rate of ordinary dividend.
Dividends cover Mein reflect the directors conservative dividend policies if suggest that much of the profit available to pay dividends is
being invested within the business or in other case there is decrease in business profits, but the directors wanted to pay dividends at
consistent rate to satisfy the shareholders expectations.
On the other hand low dividend cover indicate a reckless or aggressive Dividend policy as it implies that are lower proportion of earnings
invested in the business. As a result company may face difficulty in paying dividends at the same or even at Higher rates in the coming
years.
A high figure is good since it indicates that the company is making sufficient Prophet so sustain the payment of future dividends as this
would imply a larger percentage of earnings are being retained and reinvested in the business. On the other hand a low cover might
indicate that future dividends are at risk if probability decline. The companies need to strike a balance between the dividend payment and
the profits retained within the business.
Price earnings raise
The P/E ratio of a share is used to measure how cheap of expensive its share price is. The lower the P/E the less you have to pay for the
shares, relative to what you can expect to earn from it.
It is probably the single most consistent with flag to excessive optimism and over investment. Also serves, regularly as a marker of business
problems and opportunities. By relating price and earnings per share for a company one can analyse the markets valuation of a companies
shares relative to the wealth the company is actually creating.
One reason to calculate P/Es is for investors to compare the value of shares one share with another. If one share has a P/E twice that of
another share it is probably a less attractive investment. But comparisons between Industries between countries and between time
periods may be dangerous. To have faith in a comparison of P/E ratio, one should compare comparable shares.
The higher the P/E ratio, more the market is willing to pay for each dollar of annual earnings. Companies with high P/E ratios are more
likely to be considered " risky" investments than those with loss P/E ratio since a high P/E ratio signifies high Expectations. Comparing P/E
ratio is most valuable for companies within the same industry.
Income gearing
This ratio determines the ability of a company to meet its interest charges out of its operating profitS. For instance and income geting rate
of 0.20 20% of operating profits would be used in making payment of interest. It is a very good ratio to measure the gearing effect of debts
on profits. I get business space more interest and will result in low interest cover.
The higher ratio indicates that the company is loaded by fixed finance charges and the greater the risk that the operating profit will be
sufficient to cover interest payments. How is that too low ratio may rebil a news debt facility. Should be at least over one as an interest
cover ratio below one suggest the business is not generating adequate revenue to meet interest expense.
Present and prospective long term lenders are mainly interested in this ratio so as to determine that how adequately the loan interest
payments are covered by the profit available for such expense.
Ordinary shareholders and directors are also interested to ascertain the ability of the business to handle the fixed interest charges
moreover change in the ratio would have a significant effort on profits available to pay dividends to them.
Working capital cycle
Working capital cycle also known as operating cycle or cash cycle is a time required to purchase inventory, cell the product and collect the
cash. So it shows the time leg between the flow of cash out of the business on account of purchases and back into it again as a result of
normal trading operations i.e. Collection from customers.
For example, s is inventory for cash and then sell it for cash. The relatively short time that the inventory remains an asset of the
department of Store (no collection or payment period) represents a very short operating cycle. In another example, a car manufacturer
purchases raw material and then in curse labour and overheads to convert this material into finished cars. A car dealer buys the cars on
credit and their page the manufacture after sometime. Compared to the departmental store the car manufacturer has much longer
working capital cycle.
Working capital cycle can be shortened by reducing average inventory levels speaking up collection from accounts receivables and by
delaying payments to accounts payables. Business should not over invest in working capital. A longer cash cycle ties up a bigger investment
in working capital. It is therefore useful to monitor the length of cash cycle, and changes in it to judge whether a business has an excessive
working capital level or perhaps weather working capital in inadequate which may lead to liquidity problems.
A short working capital cycle is preferred as it indicates the business is well managing its working capital and lower value of working capital
to be seen and from other sources. On the other hand the longer the working capital cycle the larger will be the funds tide up.
Networking assets to sales
Networking assets to sales ratio gives as a glimpse of the liquidity position from yet another side. The Other liquidity measures like current
and quick ratios use balance sheets figures only where as in net working as its to cells ratio the ongoing operations of the business are
considered by including yearly sales revenue from the income statement. This ratio is considered as a prime indicator of a company's ability
to expand its operators without taking on additional debt as with increasing sales working assets requirements also increase.
The ratio profiles and inside into the lightly amount of additional working assets finding required from a given increase in sales. For
instance, if the ratio is 20% this means that the company will require net working Assets of 20 cents for every increase of $1 in sales. As an
increase in working assets requirements needs finance so management tries to minimize the level of net working assets in relation to sales.
This ratio is a useful measure of the amount of money that is in finding the day to day trading activities of the business as it includes only
those current assets and current liabilities that vary in direct proportion to sales turnover. It is possible to have a stable " current" or "
quick" ratio while this ratio is falling this would happen if cells where increasing rapidly without corresponding increase in net working
assets. This low ratio Mein indicate ' over trading' (excessive cells volume in relation to lower working assets investment in the business)
indicate that the business relies extensively upon credit granted by suppliers or the bank as a substitute for an adequate margin of
operating funds.
The lower ratio is usually preferred as it indicates that more of the working assets have been finance by short term funds resulting in lower
amount of net working assets on the other hand the larger the ratio, the more finance will be needed to fund larger requirements of net
working assets in relation to sales.
PURCHASE OF BUSINESS
Question 1 State the meaning of the term capital account
Ans: Capital account records the injection of funds within the business or withdrawal of funds out of the business by the owner.
It may also incorporate changes within the owner's capital through business operations like profit etc.
Question 2 : Explain briefly one possible reason why the partners decided to change their business into a limited company
Ans:
> The liability that each shareholder has for company debts is only limited to the amount paid for his or her shares.
> Company may find it easier to raise finance through loans, issue of shares, and debentures continuity of the business.
> Partners have to work in the business shareholders may only invest.
> Shares can easily be transferred by shareholders to other individuals or entities.
> On the other side a company has to comply with a number of statutory regulations. It has to audit the accounts annually and also has to
publish audited accounts on an annual basis.
*A company’s accounts are less private than those of a sole trader or partnership since company accounts are made available for
publication.
* Separation of ownership and control makes it difficult for ordinary shareholders to take concerted action to trust bad management
groups.
*Compliance with the Company’s Act 2007 imposes an increased administrative burden on the company. This involves the occurrence of
higher overheads on accounting and secretarial services.
Question 3 explain why the directors of Rezwan Limited are prepared to pay more for the acid acquired and their book value
Answer: Rezwan Limited, as the acquiring business pays, goodwill for the reputation, advantageous location, customer loyalty, quality
products etced their partnership . As this Goodwill is included in Rezwan's statement of financial position after the acquisition
Question 4. On 1st July C,A and B converted their partnership into a limited company. The company issued ordinary shares $1 each and C
and A at a premium of 10% and issued non-redeemable 5% preference shares to B at par. Explain how each partner will receive a return
on their investment in the new company.
Answer: All partners will become shareholders in the new company. As a result, all of them will receive their returns in the form of
dividends.
As B owns preference shares in the new company so he will receive preference dividends at a fixed rate. In addition, this dividend
payment will take priority in preference to the ordinary dividend.
C and B will own ordinary shares. The ordinary dividend amount may very from year to year and is declared by the directors out of
distributable profits. In the absence of any distributable profits, the shareholders may not receive any dividend. In addition, directors
usually do not distribute all the profits as dividends.
Question 5. A company had considered the possibility of setting the purchase of a partnership completely by a cash payment. Suggest
two advantages and disadvantages for the partners of a cash settlement for their assets
Answer. Advantages: Cash settlement will enable the partners to consider a wide range of alternative investment opportunities.
There is no risk of a decrease in the market value of shares.
Disadvantages: Topper Limited is an established company presumably engaged in an activity known to the partners so was safe to
I invest
Partners will lose control on the management of the new business.
Question 6. Describe how your calculations of goodwill would have been different if S Limited had purchased the partnership assets
only instead of the partnership business.
Answer: Goodwill normally arises when the whole business is purchased as a Going Concern however if assets of a business are sold
independently to different businesses then this may not give rise to goodwill. This may mean that the partnership business might still be in
operation after selling the assets to S Limited. Moreover, if assets are sold independently to other businesses then they are normally sold
for cash.
Question 7. Profit of the year ended 31st December 2016 of A was $80000 and B was $120000. The profit for the year of the partnership
for the year ended 31st December 2017 is expected to be 2 lakhs. The partner decides to share the profits and losses losses equally.
Discuss whether or not the merger of two businesses has been beneficial to each other( 5 marks).
Answer:
As only one year's data is available so it is difficult to make a safe decision. Based on the available data A would be better off in terms of
increase profit by 20000 whereas B will be worse of by Rs 20000 in the form of reduction in his profit.
The advantages are:
* Availability of additional capital
* Sharing of managerial responsibilities resulting in shared workload and less stress
* Spread of risk as losses will be shared
* Different skills maybe beneficial to the business
* Holiday or sickness cover
The disadvantages are:
* Sharing of profits
* Delayed decision making
* Positive disputes
* Sharing of managerial responsibilities
COMPUTERISED ACCOUNTING
Question 1. Differentiate between hardware and software
Computer hardware refers to the machine used to run the goal computer system. It comprises of computer itself, processor, monitor,
keyboard and other peripheral devices including printers, scanners, external disc, networking cables etc.
Software represents the set of instructions given to computers to carry out that tasks. This not only comprises of the package of instruction
used to run the operating system but may also include some other software packages as mentioned below:
* General Purpose Software
These packages include word processor spreadsheets graphics software and data bases used for multiple
purposes as required by the end user.
* Customised Software
These also called application packages and are designed to server specific purpose. Not expected to do any
task other than for which they are acquired.
Businesses may acquire individual modules to perform a specific task. For instance: an inventory module records only movements relating
to inventory items. On the other hand a complete accounting suit (package) will comprise of several module to serve all accounting needs
of the business as mentioned earlier in this chapter. This type of suit if contains integrated packages will make it possible for the business
to enter a transaction only once and leave the rest of the system to perform including posting to ledger accounts and production of
different reports.
Question 2. What steps should you take to ship from manual accounting to computerised accounting system?
Answer: For a running business switching to computerised accounting is a bit more difficult and time consuming compared to a new
business, to ensure that the computer system starts with the information that matches your current record.
The transition from manual to computerized accounting system involves a process with few simple steps given as follows. Once your
computerized system is fully operational you will soon wonder that how you were able to survive without accounting software
* select the package. There are several types of packages including Sage Line 950 (which is suitable for a
range of businesses), Accounts IQ (particularly suitable for construction retail and Hospitality) Xero
(particularly suitable for small businesses)
* decide who to buy the package from
 * computer networking or standalone
* installation
* setting the accounts
* decide the date of the transfer from manual accounts to the computerise system
* balance reconciliation and data entry
* enter the balance on to the new system
* training
* parallel running
Question 3. The treasurer currently maintains the records using a manual bookkeeping system and is now considering transferring the
records to a computerised accounting system. Recommend to the treasurer weather or not he should introduce a computerised
accounting system justify your answer analysing both benefits and limitations to the club.
Answer:
Advantages
* speed of processing data (automatic updating)
* space can be saved
* production of documents
* reports and financial statements
* improved accuracy
* auditing and fraud prevention
Disadvantages
* cost
* training
* systems crashing
* internal threat (employees)
* external threat
* carelessness
* employee inconvenience
Computerised accounting has advantage of automatically posting to both ledger accounts(double entry) affected by a transaction and
therefore should eliminate from types of error including arithmetical ones. It helps to reduce storage space as uses less paper. However
there will be the possibility of errors of omission and errors of original entry due to incorrect data inputting. Computer system could crash
which could lead to loss of information.
Advantages
* Fast speed, Low running costs, increased accuracy, easy production of documents, available of timely information and reports, easy
transfer of Documents, more secured and backing up of accounting data on online basis or on disks on regular basis, staff motivation and
comfort, reduces management frustration by timely production of reports and availability of information, ability to finalize tax return (the
computer software can easily be tailored to automatically calculate and finalise the amount of GST or VAT returns), the ability to deal
multiple currencies.
Disadvantages
High capital expenditure, garbage in garbage out (if data originally entered was incorrect then the output would be also inaccurate. This
concept is called GIGO. In many cases it becomes very difficult to trace the actual reason of the error especially if paper documents are not
available), security threats, danger of computer frauds, need for additional software to view or transfer report, training of personnel, issues
with general purpose software (if business is using general purse purpose or non customized software then there would be numerous
fields and templates not needed by the business. This issue and poorly designed or inappropriate software may create more confusion and
chaos),. Period of transition from manual to computerize system may place an additional strain on the staff and on the business's resources
In a nutshell, we can determine through the above discussions that the advantages of computerised accounting outweigh its
disadvantages. We would not probably find a business switched to computerised accounting reverts back to the paper based manual
accounting system.
Question 4. Differentiate between manual and computerised accounting

MANUFACTURING ACCOUNTS
Question 1. The price at which the product could be bought from an outside supplier is expected to increase. It is proposed to transfer
finished goods it production cost + 20%. Advise the directors weather or not the markup should be increased justify your answer.
Factory profit is the difference between cost producing the goods and the cost at which the same goods could be bought from an outside
supplier. It is added to cost of production so results in increase of cost of sales and an reduction in gross profit. But as factory profit is
added back to net profit so net profit remains unaltered.
The production department is a profit centre so adding mark up to the factory cost of production helps in determining its contribution to
the overall profit. Due to increase in the bought in price of finished goods the transfer price should be increased accordingly provided
production remains the same. Therefore the proposal to increase the markup upto 20% should be adopted.
Question 2. what is meant by transfer price
Transfer price in manufacturing accounts represents the cost at which the manufacturing goods could be brought from an outside supplier.
To calculate the transfer price, factory profit is added to the cost of production resulting in an increase in the cost of sales in a reduction in
gross profit. Factory profit is added back to net profits so net profit remains unaltered. This also results in an overstatement of inventory of
finished which is adjusted through the provision of unrealized profit in the balance sheet.
Question 3. Explain your treatment of finished goods in the inventory valuation of a manufacturing concern
Answer: Under the prudence concept value of an inventory should not be included in element of profit so factory profits is to be removed
from the value of finished good inventory as it is not yet been earned or realised.
Question 4. explain why a business might create a provision for unrealised profit
The finished goods inventories are valued at cost+ the profit margin. IAS 2 clearly states that inventories must be valued at lower of cost or
NRV. Inventories should not include profit element as these profits are not yet realised. As a result provision for unrealised profit is created
to remove the profit element from the Inventory of finished goods.
ABC
2. State what is meant by the terms "cost driver" and "cost pool"
Ans: Cost drivers are commonly used for the allocation of production overhead to units of production, as required by several accounting
frameworks.A cost pool is a grouping of individual costs, typically by department or service center.
3. State two similarities in use between standard costing and activity best costing
Answer: both seek to control costs and both can help set selling prices.
4. Explain three differences between activity based costing and absorption costing. Advise Chetna which method she should use.

Question 4. Explorer Limited produces two products Y and Z and has always used absorption costing to allocate overheads for each
products. The directors are now considering adopting ABC. Compare how overheads are apportioned using ABC and absorption costing.
Answer: The traditional method of costing relied on the arbitrary addition of a proportion of overhead costs to the direct cost to attain a
total product cost. The traditional approach to cost allocation refers to 3 basic steps.
* Accumulate costs within a production or non-production department
* Allocate non production costs to production departments
* Allocate the resulting production department costs to various products, services or customers.
In contrast to traditional cost accounting systems ABC systems first accumulate overheads for each organisational activity. Costs are then
collected into cost pools. They then assign these costs to product services or customers referred to as cost objects causing the activities.
Question 5. Advantages and disadvantages of ABC

Question 6. The directors of S Limited are considering using production units rather than direct labour hours as the basis of observing
fixed overheads. Advise the directors whether or not they are correct to absorb fixed overheads on the basis of direct labour hours.
Units of production base maybe appropriate in this case as company is producing only one type of product which is identical in nature.
Moreover, production is not labour intensive so company may switch from direct labour hours to units of production base, provided
change in method is expected to calculate more accurate value of production overheads.
BUDGETING
Question 2. State two adv and disadv. Of budgetary control

Answer:
Question 3. State 3 advantages that may 3 arise from preparing budgets from Standard costs.
Answer :If budget sir prepared from standard costs, they have the following advantages,
> standard costs especially when regularly updated fact Tate preparation of budgets
> standard costs are acceptable for inventory valuation under ssap 9.
> calculation of variences from budgets prepared from Standard costs become easy.
Question 4. Briefly describe how flexible budgets work?
Answer :Flexible budget recognises the existence of fixed, variable and mixed (semi fixed, semi variable) costs. It considered certain terms,
which field react to changes in the volume of activity and the budget can be' flexed' to reflect this.
A company said Sab budget for 3 Satin level of output. If the actual level of activity is higher or lower than the original estimate. The
flexible budget at St to changes in activity level by flexing the data of original budget in according with the actual level.
Flexible budget helps in planning (by preparing a series of budgets based on different volumes of activity) and as a part of the control
process (to ensure '..... Is being compared to.....')
Question 5. Hamster Limited manufacturers a single product it operates a flexible budgetary control system.Explain why flexible
budgetary control is better than a fixed budget to monitor the cost of a business.
Answer: A company sets a budget for a certain level of output. If the actual level of activity is higher or lower than the original estimate.
Budget adjusts to changes in activity level by flexing the data of original budget in according with the actual level.
Fixed budget is a budget on a single level of activity (e.g. A particular volume of cells or production) and is not adjusted for changes in the
volume of output. Business using fix budgets have no allowances for possible changes in there budgetary needs. If actual output is different
from budgeted output it will be difficult to identify the reason for any difference or what actions to take to correct any problems.
Question 6. Explain how principal budget factors affect the preparation of budgets

Question 7. Discuss the advantages to Roland of preparing a cash budget

Answer > cash budget will show to Roland the pattern of future cash flows giving information on cash surpluses, which can be used,
deficits, which have to be funded.
> short and long term cash needs can be identified and funded by Roland in an appropriate manner.
> a detailed cash budget will encourage efficiency within Roland business and will is borrowing then necessary by showing control being
exercise over resources.
Question 8. Rengaw limited bank overdraft is limited to $ 40000. State four actions the directors could take to avoid the overdraft limit
being exceeded. Where possible state the effect of each of the actions on the bank balance.
Answer: The directors could take following actions to avoid overdraft limit been exceeded
> purchase of machine in November maybe deferred, or it may be purchased on credit or on higher purchase or maybe leased. This will
reduce cash outflows by $ 30000 in November and budgeted overdraft figure in November and subsequent month.
> trade receivables maybe given an incentive to make early payments but this may involve a loss of custom and cost (discount allowed).
Moreover efforts maybe made to sell more for cash so if significant numbers of trade receivable pay in the month of sale then overall cash
cycle will be shortened and will cause reduction in overdraft.
> payments to trade payables maybe delayed to cut the cash cycle short. How ever this may result in loss of discounts receivable stopping
of delivery of goods from suppliers or a requirement from them to ' pay cash with order' in future.
> check the tendency for over payment, payments would be Tailored to match the resources.
> cut down expenses, which can possibly be delayed until liquidity position of the business is restored.
> new preference or debentures issue maybe made to improve cash.
> enhancement of overdraft facility maybe negotiated.
> dividend payment maybe delayed.
Question 9. Explain one measure that managers might adopt after cash budget deficit in one month of an annual cash budget
Question 10. Difference between cash budget and cash flow statement

Question 12. What is meant by a master budget

Answer: A master budget is a set of interconnected budgets of Sales, Production, cost, purchases, income etc and also includes formation
of financial statements.
Question 13. Differentiate between standard cost and budget
Answer: Both 'standard costing' and a 'budgetary control system' aim at the same objective- managerial control. This gets support by the
fact that both use predetermined cost for the coming period. Periodical reports are also prepared for both systems to compare budgeted a
standard cost with actual cost to pin point favourable or adverse areas. On this basis many people believe that the two are the same and
cannot function independently.
A standard provides cost estimation per unit of activity whilst a budget provides the cost expectation for the total activities. Standard costs
represent target costs that should be obtained if certain performances are achieved. Standard cost are expressed on per unit basis so the
help in building flexible budgeting and feedback system(comparison of actual performance with plant performance).
The principal difference between budgets and standard cost lies in the scope budget estimate requirements in terms of workforce,
finances, sales etc for coming activity. They act as a guidepost which keeps the business on a chartered course to atain a given objective.
Standards on the other hand estimate individual costs to be inquired within effective and efficient working conditions.
Usually both systems of standard costing and budgetary control are operated together as both are interelated but it must be emphasized
that they are not intodependent. Both systems can be operated independently but as both facilitate each other so it would be difficult to
operate one of them in the absence of the other.
Question 14. Differentiate between forecasting and budgeting
Answer: Forecasts are projections of what is likely to happen usually over multiple years based on past and current conditions. Budgets are
the estimates of future financial conditions over a specified period, reflecting what an organisation has set itself as a target for what should
happen based on targets, efforts, and plans to improve the present conditions.
Though forecasts and budgets look alike forecasting is a bit more general and helps in preparation of budgets while budgeting is a bit more
specific to financial conditions. In other words ab budget is a plan where as a forecast is a prediction of future events and conditions. When
it is first established a budget will also be a forecast that is forecast and plan should coincide.
STANDARD COSTING
1. Explain the terms standard to costing.
Ans: Standard costing system is a tool for planning budgets, managing and controlling cost. Eat evaluate cost management performance
through variance analysis.
2. Explain four ways in which standard costing may be helpful to management
Ans: The following are the advantages of using standard costing
> standard costing helps management in the planning and control of the business. Act as a control device by highlighting those activities
those do not conform to plan, and does all acting decision makers to those situation that may be' out of control" and in need of corrective
action.
> it makes budgets easier to prepare
> it makes budgets more realistic
> it AIDS setting of selling price
> it it's decision making
> it helps with controlling resources
> it provides a benchmark to measure actual performance
> it provides a yardstick against which actual performance maybe measured
> it identifies areas where savings could be made
> it enables the use of responsibility accounting by allocating responsibility for variences to different managers
> it it facilitates the preparation of budgets
> it's simplifies the task of pressing cost to products for inventory valuation purposes
> it permits Management by air exception which means that the managements attention is concentrated on the important deviations
from standards and budgets
3. Explain one reason why the following variance is calculated in(a) my tab arisen:
i> sales price
ii> sales volume
iii> material price
iv> labour efficiency
Ans: i>Sales price variance:
> change in market conditions
> price cuts
> imposition of sales tax
> change in material prices or wage costs
ii> sales volume variance
> high sales prices by business in comparison to competitors
> change in customers test and preferences
> increase in competition level in the market
> for sales forecasts
> poor marketing of products
> less aggressive advertising or marketing strategies
> deficient product design emerging from poor engineering
iii> material price variance
> standard price set unrealistically
> unpredictable increase of material prices
> change of superior with worse terms
> buying superior quality than planned
> losing trade(quality) discounts by paying in smaller quantities
> change in market conditions eg. Inflation, increase in duties like import duties, change in interest rates etc
iv> material usage variants
> use of superior or inferior quality than planned
> change in production techniques
> greater or lower rate of scrap(wastage) than planned
> hire of higher or lower grade(skilled) of workers
> errors in allocating material to jobs
> extra hours mint stop demotivated / tired
> in efficient use of material
v> labour rate variance
> hiring of lower grade(skill) of workers than planned
> Unplant decrease in overtime or bonus payments
> Unexpected decrease in wage reds may be due to market conditions
> increasing supply of labour due to unemployment or for other reasons
vi> labour efficiency variance
> use of high or low grade of labour
> use of superior or inferior material
> poor or good supervision
> change in production process(techniques)
> lack of or improved staff training
4. Variable overhead expenditure variance
> increased or decrease in general price level
> effects due to seasonal variations
> poor budgeting
> wrong classification of variable overheads as fixed overheads or vice e versa
Variable overhead efficiency variance
> age label or health conditions of workers
> hiring of higher or lower skilled labour than planned
> change in production process(techniques) or Technology
> effects of learning curve after hiring new or in experienced workers
Fixed overhead expenditure variance
> increase or decrease in general price level
> effects due to seasonal variations
> good or poor cost management
> wrong classification of variable overheads as fixed overheads or vice e versa
Fixed overhead volume variance
> increase or decrease in production volume
> increase your decrease in demand level
> change in labour productivity
> loss of production due to strike, inventory outs, machine breakdowns or other reasons
Fixed overhead volume efficiency variance
> age level or health conditions of workers
> hiring of higher old lower skilled labour than planned
> change in production process(techniques) aur Technology
> effects of learning curve after hiring new or in experienced workers
> hiring of higher or lower scaled labour than planned
Fixed overhead volume capacity variance
> hours walked higher or lower than budget
> increase or decrease in overtime hours due to change in demand
> change in demand level of companies products
> production of new equipment or tools
5. Discuss possible links between two pairs of variances calculated above
Ans: i> due to purchase of better quality material, the material price variance is likely to be adverse due to purchase at higher rate.
However, as better quality of materials would result in less wastage and spoilage so material uses variance is likely to be favourable. In
addition to use of better quality material labour efficiency Mein improve resulting in favourable efficiency variance.
ii> the use of low skilled labour would be cheaper resulting in favourable labour rate variance. However labour efficiency and material uses
variences I likely to be adverse due to slow speed, proper handling of production facilities and buy making more mistakes in using material.
6. State which costing method is best suited to the following situation:
i> a company wishes to calculate a break even point
ii> a customer request sir code for the manufacture of a large one of item
iii> goods are produced in a sequence of continuous manufacturing operations
iv> production cost need to a contain an element of the cost of support or service departments
v> a price is needed for one item out of a set of identical items
Ans: i> marginal costing
ii> absorption costing
iii> job costing
iv> batch or unit costing
v> process costing
7. For each event listed below identify which variance would be affected and give one example of a variance which might arise. State
whether the effect would be favourable or adverse
i> theft of raw materials
ii> changing suppliers making raw materials more expensive
iii> giving cells discounts for bulk buying
iv> investment in more reliable machinery
v> decrease in overtime hours
Ans: i> materials uses variance................. Adverse
ii> materials price variance................ Adverse
iii> shares price variance................... Adverse
iv> labour efficiency variance.............. Favourable
or
Materials uses variance ................ Favourable
v> materials price variance................ Adverse
or
Materials uses variance................. Favourable
vi> labour rate variance................... Favourable
8. Suggest reasons why the cost per unit could change with the increase in cells for
i> direct material
ii> direct labour
Ans: Direct material cost per units usually decreases with the increase in the units of cells and production due to bulk buying discount,
reduction in carriage cost on per unit basis.
Direct labour cost per unit may increase due to increase in the units of production due to increase in overtime cost or non availability of
labour with required skill at current labour rate.

9. In an attempt to control cause considering to:

i> stop the quality assurance checks usually made during the production process
ii> find the cheaper supplier for materials to make the blankets
iii> keep the selling price at $40 per blanket. Recommend to Khalid which option or options he should choose. Justify Your answer
Ans: If business stops the quality assurance checks usually made during the production process then cost may reduce but it may effect
quality of product resulting in ultimate reduction of cells and profits. This food then be supplemented by more skill labour force as long as
the cause does not exceed the benefit.
Cheap aur low quality materials Mein lead to adverse material and Labour efficiency variance and will reduce sales / profit. Reputation of
the business may also suffer.
Keeping the selling price at $40 power blanket will not have a direct effect on costs
10. Discuss different types of standard as used in standard costing
Ans: Current standards
> based on current working conditions( current efficiency is, current wastages etc )
> the disadvantage is that they do not attempt to improve on current efficiency levels
Basic standards
> kept on altered for a long period of time
> maybe out of date as do not account for changes in technology and efficiency levels of workers
> used to show changes in efficiency or performance over a long period time
> least useful and least common type of standard
Ideal / perfect / unattainable standards:
> based on perfect working condition ie. The assume that there are no wastages, no in efficiency, no breakdown, no idle time, no spoilage
etc
> have unfavourable motivational impact on workers as they know that reported variences will always be adverse
> useful in determining that were actual performance Falls short of the ideal.
Attainable / efficiency standard:
> they assume that a standard amount of work will be done efficiently
> they make allowance for normal wastages of material, normal idle time of labour, normal machines breakdowns but still present
Employees with the reasonable challenge to achieve the standard.
11. Please down the factors which must be taken into account in the setting of standards
Ans: > the expected level of activity is set at an unrealistically high level then they may not act as an incentive if workers considered that
the standards are unachievable. Unrea risically high level of activity may also cause under costing of products
> A sound method of budgetary control is desirable
> requires the support of Management and the approval of the work force. A series of induction / training courses for staff and employees
would be helpful
> the degree of sophistication / complexity must be appropriate to the type of Business Centre needs for management information
> standards should be based on a level of performance which is reasonably achievable by N experience and properly motivated workforce
when using the most appropriate production methods
12. Explain fixed and flexible budgets
Ans: A fixed or static budgets based on a projected level of output, prior to the start of the period. In other words it shows the expected
results for the single activity level. The farm " fix budget" does not mean the budget is kept on altered. Revision to fix budgets may be
made if situation requires so. Fixed means that the budget is not designed to change with changes in activity level. Once sales and
expenses are estimated become the relevant benchmarks.
Do a fixed budget is very useful for planning and control purposes. however, problems may arise due to use of fix budgets for performance
evaluation. Specifically when the actual output varies from the anticipated level very answers are likely to arise. These variences can be
quite misleading as eg. If a business great tea accident the sales goal it is reasonable to expect cost to also exceed land levels especially the
variety costs weChat directly related to volume. We know it is a good thing to produce and sell more than planned, princess resulting from
the higher cost can appear as a bad thing. The opposite occurs when volume is less than anticipated. How ludicrous would it be to fault the
manager of the business for having cost over runs?
Flexible budget
It is essential for proper cost control to compare actual and budgeted performance for the same level of activity the flexible budget serves
the purpose by comparing like with.... The flexible budget response to changes in activity by adjusting or flexing for changes in activity
levels. It recognises that falling to meet sales girls should be accompanied by A reduction in variable cost. It would make no sense to
congratulation a manager for holding cost down in this case. A flexible budget is one that reflects expected cost as a function of business
volume; when sales rise so do certain budgeted, and vice versa. If a businessman actually produced and sold 50000 units, then
management should compare actual cost and continues for 50000 units to what the business should have spent to make 50000 units not
to what the factory should have spend on 45000 units or 55000 units or any other output level.
13. The management of the company is evaluating a plan to retrain the existing workers to improve the efficiency. Discuss the
disadvantages to 8 PLC if the proceed with this plan
Ans: >Once fully trained staff may leave for better paid jobs
> financial cost of training may be high
> work timing is lost when staff are being trained
> Quality of training must be high for it to have a positive effect.
INVESTMENT APPRAISAL
1. State the advantages and disadvantages of using the following methods accounting rate of return, payback period, IRR, NPV
Ans: ARR
Advantages
> profitability of the project may be compared with present profitability of the business
> it is relatively easy to calculate
disadvantages
> average annual profit may not be typical of any year
> limiting of cash inflows and out flows is ignored
> it ignores the payback risk factor
> it ignores the time value of money
> profit is 'subjective' ( provisions for depreciation, bad debts etc)
> no commonly accepted method of calculating capital employed
> ignores duration of project
Paybackperiod
Advantages
> it is relatively easy to calculate
> calculation of Net flows is less subjective than calculation of profitability
> where completing project serving considered the risk factors may be compared as risk maybe reduced by preferring early cash flows or
short term projects
> short payback periods benefit business' liquidity and facilitate faster growth
> useful as a first screening tool
disadvantages
> life expectancy of project is ignored
> different projects may have similar payback periods different patterns of cash flows
> time value of money is ignored
IRR
Advantages
> indicates return Actually to be expected from expenditure
> may exist in ranking different proposals
> often used in businesses
> recognises time value of money
Disadvantages
> more difficult to calculate then npv
> npv is usually more useful in ranking different projects
NPV
Advantages
> time value of money is used
> easy to understand
> greater importance
> given to earlier a cash flows
2. In what ways might investment decisions be affected by non financial factors
Answer: > Delivery and installation time of acids to be bought
> can quality of output be maintained or not
> weather or not the workforce would need training to use the assets
> new assets may be dangerous to use
> environmental issues
> compatibility with existing projects
> reliability of project's forecast in the long run
> workers availability with required skills
> political stability
> current economic situation
3. The directors of great PLC could finance the new project by issuing new ordinary shares and not using a bank loan.
a] explain how financing the new project from the proceeds of issuing new ordinary shares would affect the accounting rate of return
b) state and explain two other sources of finance for the project
Answer: a. If project is not finance through loan then increase would not be charged to the project there for the profit should be higher.
Result in a higher accounting rate of return
b. Preference shares or debentures
4. Explain to the directors which is the more valid method of investment appraisal
Answer: Npv as it takes into account the time value of money. It is based on cash flow which is more objective that accounting profit.
Moreover it takes account of the cost of capital.
Question 4. Explain briefly what you understand by the internal value of Return IRR of a project
Answer: The internal rate of return IRR is the discount rate at which net present value is zero. In other words it is the discount rate at which
net present value of inflows is equal to the present value of out flows. If cost of capital is lower than the internal rate of return then the
proposal should be rejected and vice versa. The negative npv reveals that the IRR is lower than the cost of capital.
Question 5. Suggest why clay requires the new machine to produce an IRR of at least 22% if it already produces a positive npv.
Answer: Although projects having positive net present value should be considered, provided other factors and conditions are favorable.
Clegg requires IRR of at least 22% perhaps due to the reason that 22% is the rate of return on capital employed. Projects having an irr of
less than present ROCE of 22% may dilute the present profitability. So this maybe a reason for not proceeding with the expenditure
regardless of the favourable net present value.
Question 6. State and explain two advantages that discounted cash flow has over payback as a method of capital investment
Answer: Discounted cash flow techniques recognise that $1 received now is worth more than one dollar received afterwards - time value of
money, where as payback ignores this. Discounted cash flow techniques recognise cash flows for the entire life of the project, whereas
payback period ignores this.
Question 7. In what ways might investment decisions be affected by non financial factors
Answer * delivery and installation time of assets to be bought.
* can quality of output be maintained or not
* weather or not the work force would need training to use the assets
* new assets may be dangerous to use
* environmental issues CSR
* compatibility with existing projects
* reliability of the project's forecast in the long run
* workers availability with required skills
* political stability
* current economic conditions