Chapter 2: Financial Information

Question 1

What are the financial statements and what information do they provide? (5)

Answer 1

1. SOFP= provides information on a business’ assets and liabilities.
2. P&L= provides information on the performance of a business from their trading.
3. Other comprehensive income= shows income and expenses not shown in the P&L.
4. SOCIE= provides information on how the equity of the company’s ownership has changed.
5. Cash flow= shows the movement of cash in and out of the company.

Question 2

What is stewardship? (1)

Answer 2

Stewardship is the accountability of management for the resources entrusted to it by the owners and government.

Question 3

Who uses the financial statements? (8)

Answer 3

1. Customers.
2. Suppliers.
3. Investors.
4. Management.
5. Trade unions.
6. Lenders.
7. HMRC.
8. The general public.

Question 4

The form and content of limited company accounts is laid out is the companies act.

What does the companies act include? (3)

Answer 4

1. Formats for the financial statements.
2. Fundamental accounting principles.
3. Variance analysis.

Question 5

What does management accounting provide information for? (3)

Answer 5

1. Planning= establishing objectives and strategies to meet those objectives.
2. Decision making= involves considering information provided and making an informed decision.
3. Control= managers take corrective action where appropriate especially for good or bad consequences.

Question 6

What are the types of planning? (2)

Answer 6

1. Tactical planning= short term.
2. Strategic planning= long term.

Question 7

What does most management accounting reports include? (4)

Answer 7

1. Budget reports.
2. Variance reports between actual and budgeted costs.
3. Reports of KPIs to ensure management focuses on what is most important to the business’ success.
4. One off reports that look at individual decisions eg looking at department costs to avoid shutting down a department.

Question 8

What should you consider when discussing a management report? (4)

Answer 8

1. Basis of preparation= who prepared it and why.

A manager preparing a budget to justify their spending maybe overly optimistic if it means they secure more funding.

2. Figures used= if a report uses historic figures you could question if they’ve been verified eg from audited accounts.

If sales has increased by 3% every year for the past few years, a 10% forecast is unrealistic.

Question 9

What should we focus on when considering budgeting, performance, management and control? (4)

Answer 9

1. Target setting= we should establish how much pressure/ incentives there is in for managers and whether it’s too excessive.

Unfair targets may lead to demotivation.

2. Assigning responsibility= if a report contains variances and responsibility is assigned, we should check it has been assigned fairly.
3. Flexing= where actual sales volumes differ from budgets, the budget should be flexed to ensure a better comparison.
4. The impact on people concerned= the tone of the report should avoid being too aggressive.

Question 10

What should we consider when making decisions? (2)

Answer 10

1. The methods used= making decisions is the use of relevant costing and future cash flow.
2. Ignore sunk costs, depreciation and overheads that aren’t in the cash flow and will be incurred anyway.
3. We should be focusing on contributions as cash flow not gross profit.

Question 11

When are key performance indicators used? (2)

Answer 11

KPIs are used by management internally and will depend on the business.

A car dealer might have volume of cars sold or number of services as KPIs which will need to be tracked in the accounting function.