C10 - Accounting (10-20 Qs) BC Flashcards
Which of the following items would not affect the profit before taxation in a company’s income statement?
A) Preference dividend
B) Interest payable
C) Amortisation of leasehold property
D) Exceptional items
A - Preference Dividend
Preference dividend is deducted from the profit after tax to arrive at the profit attributable to the ordinary shareholders. All of the other options are deductions that would be made to arrive at the profit before tax.
Calculate the operating profit given the following information:
Depreciation: 40,000
Decrease in receivables: 15,000
Decrease in payables: 10,000
Net cash flow 75,000
A) 30,000
B) 35,000
C) 75,000
D) 70,000
A - 30,000
Start with the cashflow (75,000), add back the decrease in payables (85,000), deduct the decrease in receivables (70,000) and deduct depreciation to get to the profit (30,000).
If Company A is more geared than Company B, which of the following is TRUE?
A) A’s earnings more sensitive to changes in interest rates than Bs
B) A’s earning less sensitive to changes in interest rates than Bs
C) Cannot tell
D) Company B has more debt relative to equity than Company A
A - A’s earnings more sensitive to changes in interest rates than Bs
Which of the following statements most closely defines a post balance sheet event?
A) An event which takes place after accounts are published
B) An event which takes place after the company’s preliminary results have been announced
C) An adjustment required by the company’s auditors
D) An event which occurs between the balance sheet date and the date on which the directors approve the accounts
D - An event which occurs between the balance sheet date and the date on which the dicrectors approve the accounts
A post-balance sheet event is one that occurs AFTER the dare of the balance sheet but is KNOWN BEFORE approval of the accounts.
Which of the following are permissible uses of a company’s share premium account?
1. Issue of bonus shares
2. Writing off of preliminary expenses
3. Writing off of expenses of issue of debentures
4. Provision of premium on repayment of debentures
A) All of the above
B) 2, 3 and 4 only
C) 3 and 4
D) None of the above
A - All of the above
The following are the FIVE (5) circumstances where the share premium account can be reduced:
1. To issue bonus shares
2. To write off preliminary expenses
3. To write off expenses of issue of shares or debentures
4. To provide for the discount on the issue of debentures
5. To provide the premium on the repayment of debentures
A debenture is a written loan agreement between a borrower and a lender that gives the lender security over the borrower’s assets. Debentures are a type of debt instrument that are often used by large companies to borrow money over a medium to long term.
ABC Ltd has 600 components of stock at 1 January with the value of £1.62 each. during January there were the following movements:
DATE / Receipts No (£ unit price) / Issues No (£unit price)
2 January / 600 (£1.60) / —————
5 January / —————- / 200 (£1.60)
10 January / 1,000 (£1.68) / ————-
16 January / 200 (£1.55) / ————–
25 January / —————–/ 1,400 (£1.65)
What method is being used to charge issues to production?
A) FIFO
B) LIFO
C) Replacement cost
D) Average cost
B - LIFO
This is using the Last-in First Out method
The first sale is shown at cost of £1.60, the most recent purchase price.
The sale of 1,400 units towards the end of the month is using LIFO: 200 at £1.55 plus 1,000 at £1.68 plus 200 at £1.60, totalling 1,400 units costing £2,310, or £1.65 per unit.
A qualified audit report implies that:
A) The company is in financial difficulty
B) The auditors cannot come to an opinion on the financial statements
C) The auditors intend to resign at the AGM
D) The financial statements may not give a true and fair view in all respects
D - The financial statements may not give a true and fair view in all respects
A qualified audit report implies that the “true and fair” assumption may not hold true.
A business may make a profit in a particular year but have less cash in the bank
This could be arise because:
A) The company has made a bonus issue of shares
B) Payments are NOT made to suppliers
C) Customers are NOT paying their accounts
D) The depreciation charge has been increased
C - Customers are NOT paying their accounts
If customers are not paying their accounts (i.e. receiveables have grown) then cash flow will be lower than profit. Withholding payments to suppliers will increase cash flow; a bonus issue will affect neither profit nor cash flow, and depreciation will reduce profit and not affect cash flow.
Acquiror PLC has the policy of revaluing land upwards to market value
Which of the following is TRUE when comparing with a company which shows land at historic cost?
For Acquiror PLC the:
A) Return on capital employed will be higher
B) Gearing will be higher
C) Earning per share will be higher
D) Asset turnover will be lower
D - Asset turnover will be lower
The effect of revaluation will be to increase assets and equity (via the revaluation reserve). The ROCE will therefore be lower, as will be gearing. EPS will be unaffected. Due to the increase in assets, asset turnover will be lower.
Which of the following would be TRUE if the depreciation charge was lowered?
A) No change in profits
B) Increase in profits
C) Decrease in profits
D) Decrease in cashflow
B - Increase in profits
Depreciation is deducted from the profit and loss account
Given:
Current ratio: -1.1
Quick ratio: -0.8
Current Liabilities: -£10m
What is the value of stocks
A) £7m
B) £3m
C) £6m
D) £10m
B - £3m
Current ratio = Current Assets/Current liabilities
So, Current ratio x current liabilities = Current assets
-1.1 x -10m = 11m
Quick Ratio = Current assets - Stocks/Current Liabilities
So Quick Ratio x Current Liabilities = current assets - Stock
-0.8 x -10m = 8m
Hence; Current Assets - (Current Assets - Stock) = stock
11m-8m = 3m
Company A purchases a machine for £40,000 in January 2002. The company has a policy of depreciating assets 20% annually
What would the value of the machine stand at in the books after 4 years?
A) 8,000
B) 32,000
C) 16,384
D) £4,000
C - 16,384
Net book value (NBV) after 4 years = 40,000 X 0.8^4 = £16,384
P owns 75% of the net assets of S
Which of the following is TRUE regarding the consolidated accounts?
A) S should be treated as an associate
B) Consolidated accounts are not necessary
C) The consolidated accounts would show a minority interest representing shareholders funds not acquired valuing net assets at 100% of their value
D) The consolidated accounts would should a minority interest representing shareholders funds not acquired valuing net assets at 75% of their value
C - The consolidated accounts would show a minority interest representing shareholders funds not acquired valuing net assets at 100% of their value
The minority interest hows the value of the net ssets acquired at their full value (100%). In this case, the minority in interest will be 25% of the net assets at their full (100%) value.
Which of the follwing methods of calculating cost, all other things being equal, is most likely to produce the highest closing inventory during a period when the price of goods are rising and the inventory levels are rising?
A) First-in First out
B) Last-in first out
C) Average cost
D) Historic cost
A - First-in First-out
- FIFO method is an inventory valuation method that assumes that the oldest inventory is sold first
- LIFO) method is an inventory valuation method that assumes the most recent items added to a company’s inventory are the first to be sold. LIFO is only used in the U.S.
- The average cost method, also known as the weighted average inventory costing method, is a way to value a company’s inventory and stock. The average cost method calculates the cost of each unit of inventory by dividing the total cost of all inventory items by the total number of items. This gives a weighted average cost per unit, which is then applied to the cost of goods sold (COGS) and the cost of goods still available for sale.
At 31 March a business had the following assets and liabilities:
Trade receivables £42,510
Provision for bad and doubtful debts £2,620
Cash on hand and at bank £18,900
Stocks £31,660
Trade payables £55,390
Sundry creditors and accruals £17,100
Short-term investments £11,600
Motor vehicles (net book value) £101,800
Land and buildings (net book value) £152,000
Fixtures and fittings (net book value) £33,420
Bank loan (repayable in five years) £150,000
Bank overdraft £53,500
What is he business’s working capital?
A) -£35,540
B) -£23,940
C) +£113,280
D) +£263,280
B: -£23,940
Working capital is net current assets (current assets - current liabilities)
SO:
= 42,510 - 2,620 + 18,900 + 31,660 - 55,390 - 17,100 + 11,600 - 53,500
= -23,940
Motor vehicles (£101,800), Land and buildings (£152,000), Fixtures and fittings (£33,420) and Bank loan (£150,000) are not included as they are non-current assets and liabilities (i.e. longer than a year)
Which of the following would be affected if provisions decreased?
1. Income statement
2. Balance sheet
3. Cash flow statement
A) All of the above
B) 1 only
C) 2 only
D) 1 and 2 only
A - All of the above
Which of the following is NOT a basis for the qualification of an audit report?
A) Material limitation of scope
B) Material disagreement
C) Ethical disagreement
D) Fundamental disagreement
C - Ethical disagreement
Audit qualifications are either material (if they affect the reader of the accounts) or fundamental (if they change the whole meaning of the accounts).
Which of the following would you NOT expect to find on a company’s balance sheet?
A) Goodwill
B) Working Capital
C) Contingent Liabilities
D) Proposed Dividend
C - Contigent Liabilities
Contingent liabilities are not regarded as sufficiently predictable to warrant any specific provision being set aside for them in the balance sheet of the company - however disclosure of their existence in the notes to the accounts is required.
A contingent liability is a potential debt that a company might owe in the future if certain events occur such as: Pending lawsuits, Product warranties returns, Guarantees, and Disputed tax liabilities.
The following information is available from a company balance sheet:
Fixed assets: £100,000
Stock: £40,000
Overdraft: £30,000
Cash: £40,000
Trade receivables: £60,000
Trade payables: £50,000
Long-term loans: £80,000
Calculate shareholders’ funds:
A) £60,000
B) £80,000
C) £20,000
D) £240,000
B £80,000
Rearrange the standard that assets must EQUAL liabilities as in:
Shareholder’s funds + Non-current liabilities + Current Liabilities = Non current assets + Current Assets
SHF + NCL + NCL = NCA + CA
to
SHF = NC assets + C assets - NC Liabilities + C Liabilities
Hence SHF = 100,000 + (40,000 + 40,000 + 60,000) - 80,000 - (50,000 + 30,000) = 80,000
Current = Short-term, Non-Current = Long-term
Recipient Ltd increased its provision for doubtful debts from £120,000 in 2011 to £150,000 in 2012
What is the effect on the 2012 income statement?
A) Nil
B) Charge of £30,000
C) Credit of £30,000
D) Charge of £150,000
B - Charge of £30,000
The increase of a provision will be charged to the income statement. A decrease would cause a credit.
A machine is purchased for £40,000 and has anticipated scrap value of £5,000 in 10 years time
What is its value at the end of year 5, assuming a straight depreication?
A) 22,500
B) 20,000
C) 14,146
D) 23,754
A - 22,500
Annual depreciation:
(£40,000 - £5,000)/10 years = £3,500 a year
Hence £40,000 - (5 x £3,500) = £22,500
A company’s working capital comprises:
A) Cash at bank
B) Cash at bank less creditors
C) Current assets
D) Current assets less current liabilities
D - Current assets less current liabilities
Working capital represents the resources used in the day to day running of the business. These are current assets and liabities.
Which of the following would NOT appear in the reconcillation between net profit and operating cash flow?
A) Depreciation
B) Movements in provision for deferred tax
C) Foreign currency exchange rate movements
D) Administration costs
D - Admin Costs
A company has the following capital and reserves (to the £,000):
Called up shares, £1 each: 200
Share premium acount: 180
Profit and loss acount: 350
Total: 730
What is the maximum amount that could be used to make a bonus issue of shares?
A) £370,000
B) £410,000
C) £470,000
D) £530,000
D - £530k
We can use the share premium account AND the profit and loss account so £180k + £350k = £530k
A company’s income statement and its accompanying notes show all the following EXCEPT:
A) Turnover
B) Trade payables
C) Depreciation
D) Investment Income
B - Trade Payables
Trade payables are short-term liabilities in the balance sheet representing monies due to suppliers.
Which of the following is NOT an asset?
A) Patent
B) Trademarks
C) Purchased computer software
D) Goodwill
C - Purchased computer software
Purchased software is an expense.
A manufacturer has the following assets and liabilities: trade receivables £2,400, premises £2,500, trade payables £2,500, cash £63, fixtures £500, mortgage on premises £1,500, plant £1,200, bank £987, vehicles £2,000, stock £1,750.
Is the manufacturer:
A) Illiquid and solvent
B) Illiquid and insolvent
C) Liquid and solvent
D) Liquid and insolvent
C - Liquid and solvent
The company is liquid, since it has a reasonable bank balance with no overdraft. The company is solvent too, since assets far exceed liabilities.
Because it refers to “bank rather than “overdraft” take it as a current asset being bank balance rather than a liability
Given the following information, what is the debt to total capital employed gearing ratio:
Loan Capital: £20,000
Overdraft: £10,000
Share Capital: £20,000
Reserves: £15,000
A) 27.0%
B) 36.4%
C) 31.0%
D) 54.5%
B - 36.4%
Long-term debt / long-term debt + share capital + reserves
20,000 / (20,000 + 20,000 + 15,000) = 0.36366 = 36.4%
The debt-to-capital ratio is a financial ratio that measures a company’s debt in relation to its total capital, while the gearing ratio is a general term for a variety of leverage ratios that compare a company’s capital to its debt:
* Debt-to-capital ratio: Calculated by dividing a company’s total interest-bearing debt by its total capital, which includes shareholders’ equity.
* Gearing ratio: A general term for a variety of leverage ratios that compares a company’s capital to its debt. The most common type of gearing ratio is the net gearing ratio, which is calculated by dividing a company’s total debt by its total shareholders’ equity.
A company’s balance sheet includes the following items: fixed assets £22m; trade payables £3m; debentures £12m; inventory £6m; bank overdraft £1m; trade receivables £5m; short-term investments £3m.
What is the company’s quick ratio?
A) 2.0
B) 0.5
C) 1.5
D) 2.5
A - 2.0
A company’s quick ratio, also known as the acid-test ratio, is a liquidity metric that measures how well a company can pay its short-term liabilities with its most liquid assets.
The calculation of the quick ratio is:
(Current Assets - Inventory) / Current Liabilities
Current Assets excluding stock = 5 (Trade receiveables) + 3 (ST investments) = 8
Current Liabilities = 3 (Creditors) + 1 (Overdraft) = 4
Quick ratio = 8/4 = 2.0
A quick ratio of 1:1 or higher is generally considered normal, and indicates that a company has enough cash to cover its short-term liabilities. A company with a quick ratio below 1 cannot currently pay back all of its current liabilities.
Note: the bank account is in overdraft and is therefore a liability. Fixed assets and debentures are long term assets and liabilities
Which of the following best decribes a provision?
A) A charge against profits in lieu of future events/outcomes
B) Depositing money in a provision account at a bank
C) A deduction from liabilities
D) An intangible fixed asset
A - A charge against profits in lieu of future events/outcomes
Provisions are used to account for future obligations
From the following information calculate the firms current ratio:
Inventory: 30
Cash: 10
Payables: 20
Receivables: 20
Overdraft: 20
A) 0.75
B) 1.0
C) 1.5
D) 2.5
C - 1.5
Current ratio = current assets / current liabilities
Hence: (30 + 10 + 20) / (20 + 20) = 1.5
Current assets are resources that can be converted to cash within a year, such as cash, inventory, and accounts receivable. Current liabilities are obligations that must be paid within a year, such as accounts payable, wages, taxes, and short-term debt. Both current assets and current liabilities are listed on a company’s balance sheet.
A current ratio of less than 1 could be a concern. For example, if a company has a current ratio of 1.43, it means that the company has £1.43 in assets for every £1 in liabilities. This indicates that the company can cover its upcoming liabilities.
All of the following involve a change in shareholder’s funds EXCEPT:
A) Call on partly paid shares
B) Share split
C) Exercise or warrants
D) Rights issue
B - Share split
Remember a share split does not change the amount of shareholders funds. What it will do is increase the number of shares and reduce the nominal value per share but when these are multiplied together the sterling amount of share capital will remain the same.
The net book value of fixed assets is:
A) The historic value
B) The market value
C) The historic value less deprication to date
D) Accumulated depreciation to date
C - The historic value less deprication to date
Net book value (NBV) of a fixed asset is the value of the asset as recorded in a business’s accounts, which is calculated by subtracting the accumulated depreciation from the asset’s original cost.
Given the following information, calculate the net cash flow for the period:
Operating Profit: £20m
Stated after charging:
Depreciation: £4m
Loss on sale of fixed assets: £2m
Other items:
Increase in receivables: £5m
Increase in stocks: £2m
Increase in payables: £3m
A) £26m
B) £22m
C) £36m
D) £30m
B - £22m
The loss on the sale of the fixed asset converts to a negative in the cash flow statement.
Net Cash Flow = Total Cash Inflows – Total Cash Outflows
A company has reported the following in its annual report and accounts:
Operating Cash Flows: £100,00
Depreciation: £60,000
Reduction in receivables: £30,000
Reduction in payables: £40,000
What would it have reported as its profit figure?
A) £30,000
B) £50,000
C) £60,000
D) £70,000
B - £50,000
Applying the rules for cashflow reconciliations we get a movement in Operating Profit of £50,000.
Start with £100k net cash flow
DEDUCT DEPRECIATION (-£60k)
DEDUCT RECEIVABLES (-£30k)
ADD PAYABLES BACK (+£40k)
A firm makes a 3% general provision against bad and douftful debts. At the 31 December 1996, receivables were £393,200 after writing off £6,320 of bad debts. At 1 January 1996 trade receivables before provisions were £325,600
What is the charge in income statement for the year for bad and doubtful debts?
A) £2,028
B) £4,292
C) £6,320
D) £8,348
D - £8,348
Current year’s provision £393,200 x 3% = £11,796
Prior year’s provision £325,600 x 3% = £9,768
Current year’s profit/loss change = (Movement in provision) £2,028 + (Current year’s bad debt write-off) £6,320 = £8,348
Hunter PLC purchases a company called Victim PLC for £200,000. Prior to the takeover, an extract from the balance sheet of Victim PLC showed the following:
Share Capital: £100,000
Share Premium Account: £20,000
Reserves: £40,000
What is the amount of goodwill on acquisition:
A) £100,000
B) £40,000
C) £80,000
D) There is no goodwill on acquisition
B - £40,000
Goodwill = Purchase price - Asset Value
Hence Goodwill = 200k - (100 + 20 + 40) = 40k
A company’s profit after tax is £1m. If interest was £100k, the tax paid was £300k, and the capital employed was £10m, what was the return on capital?
A) 11%
B) 13%
C) 14%
D) 10%
C - 14%
The forumla for ROCE (Return on capital employed) is operating profit/capital employed. Note as the top of the equation is operating profit this needs to be BEFORE interest and tax hence:
Operating Profit = 1,000 + 100 + 300 = 1,400
ROCE = 1,400/10,000 = 14%
Operating profit, also known as operating income or operating earnings, is the amount of money a business makes from its core operations before accounting for interest, taxes, or other non-operational costs. It’s a key metric for evaluating a business’s profitability.
To calculate operating profit, you can:
1. Start with the company’s revenue for a given period
2. Subtract the cost of goods sold (COGS)
3. Subtract other operating expenses, such as sales and marketing costs, depreciation, and amortization
*A company’s operating profit margin is a good indicator of how well it’s managed. A healthy operating profit margin varies by industry, but generally, 5% is considered low, 10% is average, and 20% or above is good. *
