Chapter1 l Solutions
1.1 Explain the difference between accounting, an account, and
l l l l l l l
accountability.
l
Accounting is a collection of systems and processes used to record, report and
l l l l l l l l l l l l
interpret business transactions. An account is an explanation or report in
l l l l l l l l l l l
financial terms about those transactions. Accountability arises from the
l l l l l l l l l
stewardship function, that managers have to provide an account to other
l l l l l l l l l l l
stakeholders in the business.
l l l l
1.2 Summarise the main activities of management accountants. l l l l l l
The main activities of management accountants includes participation in
l l l l l l l l
planning, primarily through budgets; generating, analysing, presenting and
l l l l l l l l
interpreting information to support decision-making, and monitoring and
l l l l l l l l
controlling performance.
l l
1.3 Explain how the role of management accounting has changed over the last
l l l l l l l l l l l
100 years.
l l
The origin of management accounting was cost accounting in factories, where
l l l l l l l l l l
accountants were close to the business and advised non-financial managers.
l l l l l l l l l l
Management accountants have advised on economies of scale as well as of scope l l l l l l l l l l l l
as businesses grew and diversified as divisionalization, conglomerates and
l l l l l l l l l
multinational organizations increased the demand for accounting information.
l l l l l l l l
Non-financial performance information has come to challenge management
l l l l l l l l
accounting information. Although new techniques have been developed, new
l l l l l l l l l
manufacturing technologies and the growth of service industries has not been
l l l l l l l l l l l
matched by the changing role of management accountants. Management
l l l l l l l l l
accounting is increasingly decentred in organizations, with IT carrying out the
l l l l l l l l l l l
bulk of routine transaction processing. Organizations are increasingly looking
l l l l l l l l l
for management accountants to use their financial expertise to contribute to
l l l l l l l l l l l
strategy formulation and implementation.
l l l l
,Chapter 2 l Solutions
2.1 Explain the idea of value-based management and how shareholder value
l l l l l l l l l
relates to the interaction between product and capital markets.
l l l l l l l l l
Value-based management uses a variety of techniques to measure increases in l l l l l l l l l l
shareholder value, which is assumed to be the primary goal of all business
l l l l l l l l l l l l l
organizations. Shareholder value refers to the economic value of an investment
l l l l l l l l l l l
by discounting future cash flows to their present value using the cost of capital for
l l l l l l l l l l l l l l l
the business. To achieve shareholder value, a business must generate profits in
l l l l l l l l l l l l
their markets for goods and services (product markets) that exceed the cost of
l l l l l l l l l l l l l
capital (the weighted average cost of equity and borrowings) in the capital
l l l l l l l l l l l l
market.
l
2.2 Explain the key issues in corporate governance as they relate to
l l l l l l l l l l
accounting.
l
The responsibilities of the Board include setting the company’s strategic goals,
l l l l l l l l l l
providing leadership to senior management, monitoring business performance
l l l l l l l l
and reporting to shareholders. The last two of these explicitly relate to accounting,
l l l l l l l l l l l l l
and the first two implicitly do so. In the UK the Combined Code and in the US the
l l l l l l l l l l l l l l l l l l
Sarbanes-Oxley Act include important responsibilities of the Board in relation to
l l l l l l l l l l l
financial statements and performance management. The role of a Board is to
l l l l l l l l l l l l
provide leadership of the company within a framework of prudent and effective
l l l l l l l l l l l l
controls which enables risk to be assessed and managed. These controls include
l l l l l l l l l l l l
many accounting controls including budgets, capital expenditure evaluations,
l l l l l l l l
etc. The financial reports of a company are the responsibility of the Board which
l l l l l l l l l l l l l l
must ensure that the company keeps proper accounting records which disclose
l l l l l l l l l l l
with reasonable accuracy the financial position of the company at any time and
l l l l l l l l l l l l l
ensure that financial reports comply with the Companies Act. The Board is also
l l l l l l l l l l l l l
responsible for safeguarding the company’s assets and for taking reasonable steps
l l l l l l l l l l l
to prevent and detect fraud.
l l l l l
,Chapter 3 l Solutions
3.1 An accounting system comprises accounts that can be grouped into:
l l l l l l l l l
c) assets, liabilities, income and expenses
l l l l l
3.2 A transaction to record the sale of goods on credit would involve a double
l l l l l l l l l l l l l
entry for the sales value to the following accounts:
l l l l l l l l l
d) increase debtors and increase sales
l l l l l
Note there also is an associated entry for the cost of goods sold: increase cost of
l l l l l l l l l l l l l l l
sales and reduce inventory
l l l l
3.3 A retail business has sales of £100,000 cost of goods sold of £35,000 salaries
l l l l l l l l l l l l l
of £15,000 rental of £4,000 and advertising of £8,000. All of the income and
l l l l l l l l l l l l l l
expenses have been paid out of the owner’s initial capital of
l l l l l l l l l l l
£25,000. In addition, the business paid cash of £30,000 for stock (which
l l l l l l l l l l l
remains unsold) and purchased equipment on credit for £20,000. The
l l l l l l l l l l
financial statements of the business would show:
l l l l l l l
b) Profit of £38,000 cash of £33,000 and capital of £63,000
l l l l l l l l l
l Profit Sales 100,000
Cost of sales l l -35,000
Salaries
l -15,000
Rent - 4,000 l
Advertising - 8,000 l
£38,000
Cash Capital£25,000
Plus profit 38,000 l
- Inventory
l -30,000
£33,000
Capital Initial £25,000
Plus profit l 38,000
£63,000
Assets
Cash 33,000 + Equipment 20,000 + Inventory 30,000 = 83,000 Liabilities
l l l l l l l l l l
Creditors (Equipment) 20,000 + Capital 63,000 = 83,000 l l l l l l l
3.4 A Balance Sheet shows liabilities of £125,000 and assets of £240,000. The
l l l l l l l l l l l
Income Statement shows income of £80,000 and expenses of £35,000.
l l l l l l l l l l
Capital is:
l l
b) £115,000
, Capital = assets – liabilities = 240,000 – 125,000 = 115,000
l l l l l l l l l l
3.5 A transaction to record the purchase of fixed assets on credit would
l l l l l l l l l l l
involve:
l
c) increasing creditors and increasing fixed assets l l l l l
3.6 For each of the following transactions, identify whether there is an
l l l l l l l l l l
increase or decrease in profit, cash flow, assets or liabilities:
l l l l l l l l l l
Transaction Profit Cash Flow l Assets Liabilities
Income- l (excluding
l Expenses cash)l
Issuessharesto l l Increases Increases
public
l (Equity)
l
Borrowsmoney l Increases Increases
over 5 years
l l l (Longterm
l l
debt)
l
Payscashfor
l l Decreases Increases
equipment
l (Fixedasset)
l l
Buysinventoryon
l l Increases Increases
credit
l (Current
l (Current
l
asset:stock)
l l liability:
l
creditors)
Sellsgoodson
l l Increases 1. Increases
credit
l (Sellingprice
l l (Current
l
less cost
l l asset:debtors
l l
price)
l @ selling
l l
price)
l
2. Decreases
(Current
l
lasset:stock@ l l
cost price)
l l
Pays cash for
l l Decreases Decreases
salaries,rent,etc.
l l l (Expenses)
l
Payscashto
l l Decreases Decreases
suppliers
l (Current
l
liability:
l
Creditor)
l
Receives cash l Increases Decreases
fromcustomers
l l (Current
l
asset:debtors
l l
Depreciates Decreases Decreases
equipment
l (Depreciation
l (Fixedassets)
l l
expense)
l
1.1 Explain the difference between accounting, an account, and
l l l l l l l
accountability.
l
Accounting is a collection of systems and processes used to record, report and
l l l l l l l l l l l l
interpret business transactions. An account is an explanation or report in
l l l l l l l l l l l
financial terms about those transactions. Accountability arises from the
l l l l l l l l l
stewardship function, that managers have to provide an account to other
l l l l l l l l l l l
stakeholders in the business.
l l l l
1.2 Summarise the main activities of management accountants. l l l l l l
The main activities of management accountants includes participation in
l l l l l l l l
planning, primarily through budgets; generating, analysing, presenting and
l l l l l l l l
interpreting information to support decision-making, and monitoring and
l l l l l l l l
controlling performance.
l l
1.3 Explain how the role of management accounting has changed over the last
l l l l l l l l l l l
100 years.
l l
The origin of management accounting was cost accounting in factories, where
l l l l l l l l l l
accountants were close to the business and advised non-financial managers.
l l l l l l l l l l
Management accountants have advised on economies of scale as well as of scope l l l l l l l l l l l l
as businesses grew and diversified as divisionalization, conglomerates and
l l l l l l l l l
multinational organizations increased the demand for accounting information.
l l l l l l l l
Non-financial performance information has come to challenge management
l l l l l l l l
accounting information. Although new techniques have been developed, new
l l l l l l l l l
manufacturing technologies and the growth of service industries has not been
l l l l l l l l l l l
matched by the changing role of management accountants. Management
l l l l l l l l l
accounting is increasingly decentred in organizations, with IT carrying out the
l l l l l l l l l l l
bulk of routine transaction processing. Organizations are increasingly looking
l l l l l l l l l
for management accountants to use their financial expertise to contribute to
l l l l l l l l l l l
strategy formulation and implementation.
l l l l
,Chapter 2 l Solutions
2.1 Explain the idea of value-based management and how shareholder value
l l l l l l l l l
relates to the interaction between product and capital markets.
l l l l l l l l l
Value-based management uses a variety of techniques to measure increases in l l l l l l l l l l
shareholder value, which is assumed to be the primary goal of all business
l l l l l l l l l l l l l
organizations. Shareholder value refers to the economic value of an investment
l l l l l l l l l l l
by discounting future cash flows to their present value using the cost of capital for
l l l l l l l l l l l l l l l
the business. To achieve shareholder value, a business must generate profits in
l l l l l l l l l l l l
their markets for goods and services (product markets) that exceed the cost of
l l l l l l l l l l l l l
capital (the weighted average cost of equity and borrowings) in the capital
l l l l l l l l l l l l
market.
l
2.2 Explain the key issues in corporate governance as they relate to
l l l l l l l l l l
accounting.
l
The responsibilities of the Board include setting the company’s strategic goals,
l l l l l l l l l l
providing leadership to senior management, monitoring business performance
l l l l l l l l
and reporting to shareholders. The last two of these explicitly relate to accounting,
l l l l l l l l l l l l l
and the first two implicitly do so. In the UK the Combined Code and in the US the
l l l l l l l l l l l l l l l l l l
Sarbanes-Oxley Act include important responsibilities of the Board in relation to
l l l l l l l l l l l
financial statements and performance management. The role of a Board is to
l l l l l l l l l l l l
provide leadership of the company within a framework of prudent and effective
l l l l l l l l l l l l
controls which enables risk to be assessed and managed. These controls include
l l l l l l l l l l l l
many accounting controls including budgets, capital expenditure evaluations,
l l l l l l l l
etc. The financial reports of a company are the responsibility of the Board which
l l l l l l l l l l l l l l
must ensure that the company keeps proper accounting records which disclose
l l l l l l l l l l l
with reasonable accuracy the financial position of the company at any time and
l l l l l l l l l l l l l
ensure that financial reports comply with the Companies Act. The Board is also
l l l l l l l l l l l l l
responsible for safeguarding the company’s assets and for taking reasonable steps
l l l l l l l l l l l
to prevent and detect fraud.
l l l l l
,Chapter 3 l Solutions
3.1 An accounting system comprises accounts that can be grouped into:
l l l l l l l l l
c) assets, liabilities, income and expenses
l l l l l
3.2 A transaction to record the sale of goods on credit would involve a double
l l l l l l l l l l l l l
entry for the sales value to the following accounts:
l l l l l l l l l
d) increase debtors and increase sales
l l l l l
Note there also is an associated entry for the cost of goods sold: increase cost of
l l l l l l l l l l l l l l l
sales and reduce inventory
l l l l
3.3 A retail business has sales of £100,000 cost of goods sold of £35,000 salaries
l l l l l l l l l l l l l
of £15,000 rental of £4,000 and advertising of £8,000. All of the income and
l l l l l l l l l l l l l l
expenses have been paid out of the owner’s initial capital of
l l l l l l l l l l l
£25,000. In addition, the business paid cash of £30,000 for stock (which
l l l l l l l l l l l
remains unsold) and purchased equipment on credit for £20,000. The
l l l l l l l l l l
financial statements of the business would show:
l l l l l l l
b) Profit of £38,000 cash of £33,000 and capital of £63,000
l l l l l l l l l
l Profit Sales 100,000
Cost of sales l l -35,000
Salaries
l -15,000
Rent - 4,000 l
Advertising - 8,000 l
£38,000
Cash Capital£25,000
Plus profit 38,000 l
- Inventory
l -30,000
£33,000
Capital Initial £25,000
Plus profit l 38,000
£63,000
Assets
Cash 33,000 + Equipment 20,000 + Inventory 30,000 = 83,000 Liabilities
l l l l l l l l l l
Creditors (Equipment) 20,000 + Capital 63,000 = 83,000 l l l l l l l
3.4 A Balance Sheet shows liabilities of £125,000 and assets of £240,000. The
l l l l l l l l l l l
Income Statement shows income of £80,000 and expenses of £35,000.
l l l l l l l l l l
Capital is:
l l
b) £115,000
, Capital = assets – liabilities = 240,000 – 125,000 = 115,000
l l l l l l l l l l
3.5 A transaction to record the purchase of fixed assets on credit would
l l l l l l l l l l l
involve:
l
c) increasing creditors and increasing fixed assets l l l l l
3.6 For each of the following transactions, identify whether there is an
l l l l l l l l l l
increase or decrease in profit, cash flow, assets or liabilities:
l l l l l l l l l l
Transaction Profit Cash Flow l Assets Liabilities
Income- l (excluding
l Expenses cash)l
Issuessharesto l l Increases Increases
public
l (Equity)
l
Borrowsmoney l Increases Increases
over 5 years
l l l (Longterm
l l
debt)
l
Payscashfor
l l Decreases Increases
equipment
l (Fixedasset)
l l
Buysinventoryon
l l Increases Increases
credit
l (Current
l (Current
l
asset:stock)
l l liability:
l
creditors)
Sellsgoodson
l l Increases 1. Increases
credit
l (Sellingprice
l l (Current
l
less cost
l l asset:debtors
l l
price)
l @ selling
l l
price)
l
2. Decreases
(Current
l
lasset:stock@ l l
cost price)
l l
Pays cash for
l l Decreases Decreases
salaries,rent,etc.
l l l (Expenses)
l
Payscashto
l l Decreases Decreases
suppliers
l (Current
l
liability:
l
Creditor)
l
Receives cash l Increases Decreases
fromcustomers
l l (Current
l
asset:debtors
l l
Depreciates Decreases Decreases
equipment
l (Depreciation
l (Fixedassets)
l l
expense)
l
