Lecture 1

Question 1

What is Enronomics?

Answer 1

Enronomics, is a fraudulent accounting technique that involves a parent company making artificial paper only transactions with its subsidiaries to hide losses the
parent company has incurred through business activities.

Question 2

What is Enronitis?

Answer 2

Enronitis is the nervousness over a company because of

suspected accounting problems.

Question 3

What is a shell company?

Answer 3

A non-trading company set-up for financial maneuvers.

Question 4

What is mark-to-market accounting?

Answer 4

Stating forecast/ predicted profits rather than realised profits

Question 5

What are the main workings of a financial function?

Answer 5

To purchase/invest in assets which should generate cash.

To payback investors who will raise cash and reinvest in the financial function

Question 6

What are two key financial processes?

Answer 6

Financial Accounting

Financial Planning

Question 7

What are some of the roles and responsibilities of financial accounting?

Answer 7

Maintain accurate records
Sales invoicing
Processing of credit and debit notes
Management of sales terms
Management of price changes
Credit control
Management of purchase orders
Payment of purchase invoices
Stock reconciliation
Management of petty cash and expenses
Provision of statutory accounts

Question 8

What is included in a principle (annual) statement of accounts?

Answer 8

Directors report
Auditors report
Profit and loss account
Balance sheet
Notes of account
Cash flow statement (not required by company law)

Question 9

What is prudence convention?

Answer 9

This promotes caution when assessing value. At all times lower value should be used.

Question 10

What is objectivity convention?

Answer 10

The need for subjectivity to be eliminated and make sure there is evidence in numbers

Question 11

What is money measurement convention?

Answer 11

Only include what can be measured in monetary terms. (E.g not happiness of customers etc.)

Question 12

What is historic cost convention?

Answer 12

Consistency in recording depreciation of assets

Question 13

What is consistency convention?

Answer 13

Consistency in interpretations for valuation purposes

Question 14

What is materiality convention?

Answer 14

A certain amount of judgement is allowed when differentiating between assets and materials

Question 15

Directors demonstrating accountability means?

Answer 15

Directors must demonstrate that measures have been put in place to ensure they make decisions for the greater good

Question 16

What is contained in the directors report?

Answer 16

A short narrative reviewing key events of the year

Question 17

What is contained in the auditors report?

Answer 17

Normally just a few lines confirming external auditors have examined reports and found them to be in order

Question 18

How would you calculate the value of a company?

Answer 18

Subtracting all the debts from the income and the assets.

Question 19

What does the balance sheet represent?

Answer 19

The value of a business by analysing its assets and liabilities

Question 20

How would you calculate the profit of a company?

Answer 20

Subtracting the business income (revenue) from its expenses

Question 21

What does the profit and loss statement represent?

Answer 21

The revenue and expenses of a business over time

Question 22

Define and explain financial statements?

Answer 22

Accurate evaluation of profit and value.

Profit = business expenses - business income (revenue). Profit and loss statements represent revenues and expenses over a period of time.

Value = (Income+Assets) - debts. Balance sheet represents value by analysing debts and liabilities.

Question 23

3 Main Responsibilities of the Financial Function ?

Answer 23

Ensuring overall business objectives of the company are met.

Legal and corporate requirements are met.

Maintain standards through effective management of:

• Profit
• Corporate Assets
• Captial Projects
• Strategic Development plans.

Question 24

3 Key roles in the financial function of a company ?

Briefly describe each role.

Answer 24

Chief Financial Officer (CFO)

• Financial Planning
• Corporate Planning

Treasurer

• cash management
• raising capital
• banking relations

Controller

• financial statements
• accounting
• tax

Question 25

What are SPV’s, describe their use ?

Answer 25

Special Purpose Vehicles

• used to shelter most worrying liabilities from stockholder scrutiny.
• move debt off the balance sheet.
• overstates earnings.
• transfers risk to other business ventures.

Question 26

Define financial accounting, give 5 means of accounting ?

Answer 26

Maintaining of accurate records of a company’s financial activities. Should reflect all financial transactions in and out of the company.

1. Sales ledgers/accounts receivables.
2. purchase ledgers/accounts payables.
3. general ledgers.
4. asset register/real ledger.
5. Payroll.

Question 27

6 types of accounting convention ?

Answer 27

Prudence
Objectivity
Money Measurement
Historic Cost
Consistency
Materiality