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