Accounts and finance

Table of Contents

1. Topic pack - Accounts and finance - introduction
2. 3.1 Sources of finance - notes
3. 3.1 Sources of finance - questions
4. 3.2 Investment appraisal - notes
5. Investment appraisal
6. 3.2 Investment appraisal - questions
7. 3.3 Working capital - notes
8. 3.3 Working capital - questions
9. 3.4 Budgeting - notes (HL only)
10. 3.4 Budgeting - questions
11. 3.5 Final accounts - notes
12. 3.5 Final accounts - questions
    1. Final accounts - short answer questions
    2. Capital and revenue expenditure - short answer questions
    3. Profit and loss accounts - short answer questions
    4. The profit and loss account - numerical questions
    5. Balance sheets - short answer questions
    6. The balance sheet - report
    7. The balance sheet - numerical questions
    8. Depreciation - short answer questions
    9. Depreciation - numerical questions
    10. Company accounts - interactive questions
    11. Company accounts - rebuild a set of accounts
    12. Uses and limitations of published accounts - memorandum
    13. Stock valuation - numerical questions
    14. GM - are they losing it?
    15. Between a Rok and a hard place.
    16. Toyota out of reverse gear
13. 3.5 Final accounts - simulations and activities
14. 3.6 Ratio analysis - notes
15. 3.6 Ratio analysis - questions
16. 3.6 Ratio analysis - simulations and activities
17. Printable version

Company accounts - interactive questions

1

Working capital Working capital is a) the money that a firm spends on computers and tools b) all the money that a firm spends in a trading period c) the money needed, on a day-to-day basis, to keep the business functioning d) that part of a firm's profit that is kept within the business Please select an answerNo, that's not right. This is just part of a firms expenditure.No, that's not right. This ignores any receipts of money from sales or loans.Yes, that's correct. A firm must have cash, or credit facilities, at times when it has to pay key bills. If it does not have enough it will face closure.No, that's not right. It must be money, or cash, so cannot relate to profit at all.

2

Debtors Debtors are people and / or firms which: a) owe you or your firm money b) you or your firm owes money to Please select an answerYes, that's correct. Debtors are found in current assets - stock, debtors and cash - so they owe you money.No, that's not right. Debtors are found in current assets - stock, debtors and cash - so they owe you money. If you owed them money, the entry would be in current liabilities.

3

Creditors Creditors are a) an asset of a firm b) a liability to a firm Please select an answerNo, that's not right. Creditors are found in current liabilities, along with overdrafts and other short term debts. They are a liability as they have to be paid.Yes, that's correct. Creditors are found in current liabilities, along with overdrafts and other short term debts. They are a liability as they have to be paid.

A balance sheet shows the reserves of a company. They are found in the section entitled 'Financed by:' and may also be called retained profits. An extract from the balance sheet of Pill Pharmaceutical plc is shown below:

4

Financing expansion The company is spending $2 million on a new office complex. Why might it not be able to finance this expenditure from these reserves? a) Retained profits (reserves) may not, and probably will not be cash b) Reserves can only be used to pay dividends to shareholders c) Company law does not allow it d) They will probably have been spent already e) They have been accumulated over the life of the company a) Yes, that's correct. They could well have been spent before they were added to the account. Accounts are done annually, but profits are 'earned' at any time, and expenditure made.a) No, that's not right. They could well have been spent before they were added to the account. Accounts are done annually, but profits are 'earned' at any time, and expenditure made.b) Yes, that's correct. They are left after dividends have been paid. See the appropriation accountb) No, that's not right. They are left after dividends have been paid. See the appropriation accountc) Yes, that's correct. No such restriction exists.c) No, that's not right. No such restriction exists.d) Yes, that's correct. They could well have been spent before they were added to the account. Accounts are done annually, but profits are 'earned' at any time, and expenditure made.d) No, that's not right. They could well have been spent before they were added to the account. Accounts are done annually, but profits are 'earned' at any time, and expenditure made.e) Yes, that's correct. The number is the sum of the retentions made over the lifetime of the company. There could have been a reduction since last year. We only have one picture to look at.e) No, that's not right. The number is the sum of the retentions made over the lifetime of the company. There could have been a reduction since last year. We only have one picture to look at.

Forlorn Holdings plc

On 1st January 2011 Forlorn Holdings buy a new computer for $1500 and a new car for $25,000.The Tax Department allows the computer to be depreciated, using straight line methods only, at a rate of 25% per annum and the car at 40% per annum.

Forlorn Holdings plc has a business year that ends on 31st December.

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Straight-line depreciation In straight line depreciation, the book value of the item being depreciated in the accounts: a) is reduced by the same amount each year b) is reduced by an amount the firm decides each year c) is reduced by the same percentage each year d) is reduced by a reducing amount each year Please select an answerYes, that's correct. The value is reduced by the same amount over the life of the item (as agreed by the tax authority). Plant and equipment is depreciated over 10 years, so 10% of the price is deducted each year.No, that's not right. Think again. The rate is decided by the tax authority.No, that's not right. You are getting muddled with the other basis for depreciation - reducing balance.No, that's not right. You are getting muddled with the other basis for depreciation - reducing balance.

6

Written-down book value The written down book value of the computer after 1.5 years will be: a) $750 b) $937.5 c) $562.5 d) $375 Please select an answerNo. Look again at the numbers.Yes. Initial value = $1500 rate = 25% term = 1.5 years. Discount = 1,5 x 25% = 37.5%. Remaining value = $1500 x 0.625 = $937.5.No. This is the amount of depreciation. Read the question again, carefully, and answer IT. You are looking for the book value not the level of depreciation.No. Look again at the numbers.

7

Written-down book value The written down book value of the vehicle after 2.0 years will be: a) $0 b) $20,000 c) $5,000 d) $10,000 Please select an answerNo, that's not right. Look again at the question.No, that's not right. This is the depreciation, not the book value.Yes. $25,000 @ 40% pa. Residual Value = 20% of $25k = $5kNo, that's not right. Read the question. How many years?

8

Depreciation entry The depreciation entry in the accounts for the year ended 31st December 2012 for these two items will be: a) $750 b) $20,000 c) $5,750 d) $20,750 Yes, that's correct. Computer: Opening value = $1500 Depreciation = 2 x 25% = 50% = $750 Written down book value = $750 Now do the same for the car. Car: Opening value = $25,000 Depreciation = 2 x 40% = 80% = $20,000 Written down book value = $5,000. Add the two depreciation figures together and you have the answer. No, that's not right. The calculations should be. Computer: Opening value = $1500 Depreciation = 2 x 25% = 50% = $750 Written down book value = $750 Now do the same for the car. Car: Opening value = $25,000 Depreciation = 2 x 40% = 80% = $20,000 Written down book value = $5,000. Add the two depreciation figures together and you have the answer. Your answer has been saved.

9

Depreciation Depreciation is shown in the profit and loss account, and is reflected in the balance sheet. It is not a sum of money, however, nor does any cash ever move. This is because, in accounting terms, depreciation is: a) organised by the government through taxation b) added to loans by the banks c) only an allowance for wear and tear, or loss of value d) paid by the firm when it buys the asset concerned Please select an answerNo, that's not right. The government only sets the levels that are acceptable to the tax authority.No, that's not right. It is nothing to do with the banks or loans.Yes, that's correct. In a way it is a pretend cost, so reduces your tax liability.No, that's not right. Depreciation is nor paid, it is an allowance, or an assumed costs after purchase.

10

Balance sheet What does a balance sheet tell you about a company? a) How much profit a firm has made b) At a point in time, how much money a firm is using c) At a point in time, how much money a firm is using, what it is using it for d) At a point in time, how much money a firm is using, what it is using it for, and where it has got it from Please select an answerNo. The balance sheet has nothing to do with profit at all. The profit and loss account shows the profit figures.No, not quite right, but close. Remember the three point definition of a balance sheet - not only how much money the firm is using, but also what the firm is using the money for and where it got it from.No, not quite right, but close. Remember the three point definition of a balance sheet - not only how much money the firm is using, but also what the firm is using the money for and where it got it from.Yes, that's correct. This gives all aspects of what a balance sheet shows.

11

Intangible assets Why can the inclusion of intangible assets, such as brand names, be considered as a means of 'polishing' or 'manipulating' the accounts and the balance sheet in particular? There are two views to consider: i) The value is already in the accounts through the profit and loss account and the retained profits. It is the brand that drives the business, in effect. Adding values under intangible assets is really double recording. ii) The value is internal and un-checkable. It is a matter of opinion, so can be whatever the firm wants it to be. Very dangerous for the casual or unaware reader.