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.)
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 1st August 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.
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.