Professional Documents
Culture Documents
a) Net assets - are total assets minus total liabilities. This is shown specifically
in UK-style balance sheets and rarely heard of in the US. Net Assets is
usefully if you are focussing on Equity and return on equity measures.
b) Current assets - are assets that a company means to sell or collect, usually
within a 1-year timeframe
c) Current liabilities - are amounts that the company owes that it will pay or
deliver within the next 1 year
d) Net current assets - are current assets minus current liabilities- used to
assess the liquidity of a company
e) Reserves - are amounts that the company has generated or received which
it has not paid out to shareholders
4. A set of scales helps us visualise a set of accounts. What important point does it
ensure always applies?
Using a set of scales to represent a set of accounts emphasises the fact that a
set of accounts should always balance.
8. Newtons third law of motion states: For every action, there is an equal and
opposite reaction. This sounds similar to an accounting principal we discussed:
Every accounting entry has an equal and opposite entry Accountants call this
Double Entry
2
HOMEWORK 02: Preparing Accounts Solution
ASSETS LIABILITIES
Total Total
assets = 23,375 Liabilities = 23,375
HOMEWORK 03: Accruals Solution
1. The cost (or cost less expected residual value) of the truck should not be
expensed in the period it is bought but matched over its useful life to
the company. Annual charge is $2,000.
2. Interest should not be expensed when the cash flow occurs. It should be
matched to the time when the benefit was received. The benefit here
is benefit of receiving cash upfront via a loan.
3. Lets take this as 2 entries. Firstly we know that the prepayment asset
from previous year will have expired so we have to expense the asset
matching it over time up to 30th June 1998.
Secondly, we need to expense/ match the rent expense over the time it
relates to up to end of the year. As this inherently affects the balance on
the prepayment asset account it implicitly affects our recognition of the
asset on the prepayment account.
4. The tax on 1998s profit wont be paid until 1999. However, they must be
expensed in 1998 to match the expense with the profits made in that
year.
5. Dividends are paid after the period to which they relate. However, the
expense should be matched to the period of the profits they are paid
out of. Note in US-style income statements this item is not shown as an
expense, but as a movement of the Retained Earnings reserves
elsewhere.
6. When a company goes bust owing money, the prudent thing to do is not
expect to get any money or have your products returned. Although in
this circumstance it may not have become apparent that the customer
went bust until after the end of the financial year it would be prudent to
assume that the conditions that made the customer go bust had probably
already taken hold before the end of the year. As such we should
match the expense in the period in which it occurred.
7. It sounds as if the company will end up owing money, hence it must owe
money already! Auditors have basic tests on whether such liabilities are
just possible or are actually probable. The company should recognise a
liability as the misdemeanour occurred in the past. As there is no asset
associated with these that we can recognise we must expense this,
matching the expense with the period in which it occurred.
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Total Assets 16,425 10,000
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Total Liabilities 16,425 10,000
Current Assets
Debtors* 2,650 2,500
Stocks 2,700 1,000
Cash and equivalents 9,075 2,500
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Current Assets 14,425 6,000
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Net Assets 6,425 4,375
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As at 31/12/98 As at 31/12/97
* Debtors and accounts receivable arent exactly the same. Debtors would include prepayments.
HOMEWORK 5: Profit and loss Statements Solutions
These questions ask you to continue from Homework 2,3 and 4 based upon
Newark Nets (NN).
1. Where should you allocate the costs of materials you sell in a profit and loss
statement?
2. Where should you allocate the depreciation costs in a company that has no
production in a Profit and Loss statement?
3. Where should you allocate the expense of a one-off fine in a Profit and Loss
statement?
4. Which line(s) in the Profit and Loss statement is affected by discovery that a
customer has gone bust whilst still owing money to the company?
5. Which line(s) in the Profit and Loss statement is affected by discovery that an
order recorded as a sale by the company actually wasnt completed by the end
of the year?
These questions ask you to continue from Homework 2, 3, 4 and 5 based upon
Newark Nets (NN).
1. Which of the following isnt an accruals adjustment for the US-style cash flow
statement?
a) CapEx
b) Movement in interest accrual
c) Movement in tax accrual
d) Depreciation charge
2. Which of the following is an accruals adjustment for the UK-style cash flow
statement?
a) CapEx
b) Movement in interest accrual
c) Movement in tax accrual
d) Depreciation charge
Investing
CAPEX 0
Financing
Debt repayments (1,000)
Dividends 0
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Net inflow/(outflow) 6,575
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4.Using the following format, create a UK-style cash flow statement for 1998 for
Netwark Nets
Financing
Interest paid/received (625)
Dividends 0
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Returns on investments and servicing of finance
Taxation 0
Investing
CAPEX 0
Capital Raising
Change in debt (1,000)
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Net inflow/(outflow) 6,575
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