Solved by verified expert :Question One
It is widely accepted that
accounting information should be useful to the users of financial
statements.
(a) Explain who the users
of financial statements are, and explain whether you believe that
different user groups have
different information needs.
(b) Explain what makes
accounting information useful.
(c) Explain why the cash
flow statement is useful to users of financial statements. Using the
financial statements of a
listed company in your home country explain your answer to part
(c) by drawing examples
from the cash flow statement of this company. (The cash flow
statement only (NOT the
full financial statements) should be attached as an appendix to your
answer. The appendix does
not count as part of the word count.)
(60 marks)
The word limit for this
question is 900 words(this excludes any references, which you
should list at the end of
your assignment). Please note that in addition to the study guide and
course texts, there is a
lot of published literature relevant to this question and to obtain good
marks you will need to
make reference to some of that literature. Suggested resources
(such as the IAS plus
website) are available on the resource list on Blackboard
Question Two
On 1 July 2011, Mr Chips
opened a new store, which sells kitchen equipment using money
he received following the
death of his father. He has asked you to prepare his accounts for
the year to 30 June 2012
from the following summary of activity on the business’s bank
account for the year to 30
June 2012.
Debits € Credits
€
Payments received from
Customers 252,000 Payments to suppliers 96,000
Capital paid in on 1 July
2011 40,000 Staff
wages 52,000
Rent 24,000
Business rates (local tax)
14,000
Insurance
3,200
Heat and light 5,400
Purchase of fixtures and
fittings 24,000
Miscellaneous expenses 4,600
Drawings by Mr Chips 48,000
Closing balance as at
30/06/11 20,800
292,000 292,000
In addition, you discover
the following information from discussions with Mr Chips:
(i) Mr Chips gives 30 days
credit to some of his customers. At 30 June 2011, credit
customers
(receivables/debtors) owed a total of €10,000. Mr Chips has recently received a
letter from an accountant
explaining that one of his customers has gone bankrupt and is
unlikely to be able to pay
their debt of €2,000. The business’ external auditors advise that a
provision for doubtful
debts should be established representing 5% of the remaining
accounts receivable
balance.
(ii) Mr Chips has credit
terms with his suppliers and has unpaid invoices of €12,000 at 30
June 2012.
(iii) Mr Chips expects to
use the fixtures and fittings that he purchased during the year for 5
years after which they are
expected to have a residual value of £4,000. Depreciation is to be
charged using the straight
line method.
(iv) At 30 June 2012, Mr
Chips held an inventory count and found he had inventory that had
originally cost €23,000.
Included in this inventory is €10,000 of last season’s stock which he
plans to sell at the
discounted price of €8,000.
(v) The cash Mr Chips has
paid for insurance includes €2,400 which covers the year from 1
April 2012 to 31 March
2013.
(vi) A review of the
expenses for the year shows that an accrual is required at 30 June 2012
for €2,800 of professional
fees.
(vii) During the year Mr
Chips signed a contract with a construction company to refurbish his
store. This will commence
on 1stAugust 2012 and will cost €10,000.
Required
a) Prepare an income
statement for the year ended 30 June 2012, and a statement of
financial position as at
that date, for Mr Chips’s business. The balance sheet and
income statement should
follow IFRS (specifically, IAS 1). It is imperative that you
show all your workings
clearly in your answer.
25 marks
b) Mr Chips is concerned
that the charges for depreciation and the provision for doubtful
debts are reducing his
profit figure. He asks you to explain why you have charged
depreciation as an expense
in the income statement when he has already paid for
his fixtures and fittings,
and why you are making a charge for debts that he is legally
entitled to collect.
Prepare a short explanation for him, of no more than 175 words.
15 marks
(40 marks)
