Final accounts of a company

The statement of financial Position, when drawn up in accordance with International Accounting Standard 1 (Revised), may not show Net Current Assets (Liabilities), also called Working Capital. A Balance sheet, when drawn up in accordance with the companies Act 1985, does show Net Current Assets (liabilities) Evaluate whether you think it is beneficial to show Net Current Assets (liabilities) on the Statemetn of Financial Position (Balance sheet) for a company. (12) [Jan 2012] FOR benefit of showing Net Current Assets (Liabilities) Allows the user to see clearly/easily which is largest of current assets and current liabilities This enables the user to judge the net amount of liquid assets If Net Current Liabilities, then clearly the entity has a liquidity problem and allows them to take action Helps potential investors to make a decision whether to invest. Helps suppliers make a decision concerning possible credit to be given. AGAINST benefit of showing Net Current Assets (Liabilities) Net Current Assets only shows an amount in a monetary value. This does not show if this amount is sufficient. The amount required would be affected by the entitys size and industry. More useful measures of liquidity are the Current Ratio and Acid (Quick) Ratio. These could be calculated using either of the two formats. It may be better to show all the monies put into the entity on the same side of the Statement of Financial Position / Balance Sheet ie Total Equity and Liabilities. Evaluation: It is not necessary to show Net Current Assets (Liabilities) on the Statement of Financial Position. Explainhow the goodwill paid will be treated in the accounts of a company. (4) [Jan 2012] Goodwill will appear in the balance sheet of Atlantic Foods plc as an intangible asset, under the heading of Non-current assets. Correct treatment of goodwill would be to amortize over its useful economic life. Likely to derive benefits from the expenditure over a number of years, so spread the cost of this expenditure over a number of years ie matching concept gives a True and Fair view of the accounts. To write off immediately may make profit unrealistically low, and tax charge would be unfairly low. In line with recommended practice ie FRS 10

Evaluate the importance of sending a copy of the financial statements of a public limited company to shareholders at the end of the financial year. (12) [June 2011] FOR Usefulness/ Importance

Legally the shareholders must receive a copy/or have copy made available of the accounts and they can see how the funds they have invested are being used/ how company is performing Shareholders may be happy (or unhappy) with the performance of the company and may decide to buy more (sell) shares. Accounts are prepared in standard format which allows shareholders to compare the accounts of one company with another. E.g for investment potential.

AGAINST Usefulness/Importance Preparing the accounts is time consuming, and time means money. Expenses associated with preparation and sending eg printing costs and postage. However shareholders could be sent an abridged (smaller) version of the accounts which are much cheaper. Some figures are estimates e.g. Depreciation Some shareholders will not understand the accounts as they have little accounting knowledge The accounts may not be totally reliable e.g. due to window dressing, fraud etc CONCLUSION Eg It is important they receive a copy of the accounts.

Evaluate the importance of the Directors Report that accompanies the financial statements of a company.(12) [Jan 2011]
Case For Importance of Directors Report Report gives information to eg shareholders which they could use to make a decision eg invest more funds in the company. Shareholders may be assured the company is acting in an ethical manner Other stakeholders eg pressure group may use information in the Report to bring about change in company policy eg treatment of disabled Disclosures may be required under Stock Exchange regulations, which may be appropriate in the Directors Report eg legislation pending Information is given to shareholders which allows them to see in some detail how the company is performing Eg principal activities, review of position of business Post balance sheet events, future developments Names of directors, interests of directors Employee involvement, disabled employees policy Political and charitable donations Creditor payment policy, creditor payment days

Case Against Importance of Directors Report Report costs personnel time to prepare and money to print etc Directors may use Report to window dress accounts, give an unrealistic positive view of the company, as it is in their interest to do so. Readers with no knowledge of accounts may not understand the report. Conclusion

Eg Directors Report is important.

STANDARD COSTING Explain the stages in establishing a standard costing system (4) [Jan 2012] For product, obtain a product specification giving standard quantities for materials and labour Standard prices for materials obtained by consulting buyers and suppliers Standard labour rates obtained by consulting human resources department and/or unions. Standard overheads obtained by consulting management / finance department. Looking at figures for past cost of sales

Evaluate the usefulness of a standard costing system to a company. (8) [Jan 2012] FOR usefulness Allows performance to be compared with predetermined standards. Variances can be analysed and action taken to control costs. Helps eliminate waste, idle time, inefficiency etc Allows management by exception, which sees action taken only for large variances. AGAINST usefulness Takes time, expertise and money to prepare. Inaccurate standards set may be misleading and unhelpful. Conclusion Standard costing is useful BREAK EVEN ANALYSIS Is profit the same as the margin of safety? Explain your answer.(6) *Jan 2012+ Profit is equal to total sales revenue less total costs. Margin of safety is equal to actual sales revenue less sales revenue required to break even. OR actual output / sales units less output / sales to break even Therefore, the two are not the same.

It is easier to control fixed costs than variable costs. Evaluate this statement. Case for easier control of FIXED costs. It is possible to decide the length of life of a non-current asset, thus controlling the depreciation charge per year. It may be possible to negotiate with the landlord to fix a monthly rent charge. It may be possible to negotiate with the bank over the interest rate charged on a loan. Fixed costs do not change with output but variable costs do Case for easier control of VARIABLE costs. It is possible to fix direct wages, and someone will be willing to work for this rate. It may be possible to negotiate with suppliers for the price of raw materials. Some fixed costs may be impossible to change eg loan interest/repayments, business rates , depreciation , insurance

Conclusion It is easier to control fixed / variable costs. CAPITAL STRUCTURE

Explain to a potential investor the difference between ordinary shares and preference shares. (8) [June 2011]
Ordinary shares Usually one vote per ordinary share held at AGM /shareholders meetings. Dividend per year is not fixed, but varies according to performance. Last in the queue when dividends paid out of profits. Last in the queue for payments if a company is wound up. Preference shares Usually no votes to preference shareholders. Dividend per year is usually fixed, despite performance Before Ordinary shareholders in the queue when dividends paid out of profits. Before Ordinary shareholders in the queue for payments if a company is wound up.

Explain the difference between a rights issue of shares and a bonus issue of shares.(12) [Jan 2011]
A rights issue sees existing ordinary shareholders being offered the first right to purchase newly issued shares. The shares would be issued at a discount to the market value, to benefit the shareholders subscribing. The shareholder may be able to sell this right, if they do not wish to take up the issue themselves. Shareholders who do not take up the rights issue lose out by owning a smaller share of the company. A rights issue will involve the company receiving cash for the shares. The double entry would be Dr Cash Cr Ordinary shares. A bonus issue would involve the company issuing new shares to existing ordinary shareholders. The shareholders do not have to pay any money to the company for the shares. They may be issued to make the market price of the share lower, and therefore easier to trade. Or, the issue could be to make the balance sheet appear more like that of a large company. The shareholders do not really benefit, as they still hold the same percentage ownership of the company. If company has no cash for dividends they may give a bonus issue instead The double entry would be Dr Any Reserve Cr Ordinary shares.

As an alternative to issuing shares, a company is considering issuing debentures to finance Evaluate on behalf of the company, the issue of debentures to (8) [Jan 2011]
Case for debentures Company raises cash required for new investment. Fees are likely to be low compared to an issue of shares e.g. prospectus, advertising, etc No capital repayments over the life of the debenture Interest is fixed which allows budgeting to take place Debenture interest is allowed against tax so less corporation tax is paid on profits Issuing debentures instead of shares reduces the chance of a takeover Case Against debentures There will be some expenses involved in debenture issue e.g. administration, underwriting etc When debenture matures, a large capital sum has to be repaid Interest must be paid on debenture even when the company makes a loss and interest will reduce the profits

Issue of debenture means gearing ratio will increase Debenture holders are likely to insist on a charge over company assets Debenture holders may insist on some form of control e.g. a seat on the board Conclusion As a source of finance for the new marina, a debenture is probably (not) a good idea.