Exam-style Questions: Company Accounts

1. Companies A and B operate in the same market. Study the information which has been extracted from the accounts of these companies for the year ending 31 December 1997.

a) What items would you expect to be included in:

(i) current assets:

(ii) current liabilities?

b) Calculate gross and net profit ratios and return on capital for companies A and B.

c) Compare briefly the results of these two companies.

d) What other factors should a potential investor need to take into account when considering whether to invest into these companies.

(Marks available: 20)

Answer

Answer outline and marking scheme for question: 1

Give yourself marks for mentioning any of the points below:

a) (i) Stock, debtors.

(ii) Trade creditors, bank overdraft.

(5 marks)

b) GP = 44.4% and 56.25%

NP = 27.2% and 25%

Return on capital = 26.4% and 45.35%

(5 marks)

c) GP is higher for A compared with B, with A having a better NP. From the information from the accounts A seems more efficient in its selling and administration.

Return on capital is higher in B therefore there is a better return for investors. More information required to make other judgments, for example the length of time operating.

(5 marks)

d) The structure and competition in the market.

What is happening in the market and the economy as a whole.

What other investment opportunities there are.

Further information required from the accounts could include the working capital ratio and the liquidity situation.

Perhaps the structure of the debtors and the creditors.

(5 marks)

(Marks available: 20)

2. a) Explain why a business person would compile a cash flow forecast?

b) How might such accounting information be used by the creditors of a company?

(Marks available: 10)

Answer

Answer outline and marking scheme for question: 2

Give yourself marks for mentioning any of the points below:

a) A cash flow forecast is a financial statement which shows all expected receipts and expenses of a business over a future time period which shows the expected cash balances at the end of each month.

(5 marks)

b) It shows the cash position of the firm month by month, and will show when it may or may not need to borrow money. Stake holders who may be interested will be those considering lending funds to the firm, such as banks.

(5 marks)

(Marks available: 10)

3. Look at the data below and answer the questions which follow.

Mr and Mrs Roberts own a small hotel in the Lake District. They run the hotel and employ labour from the local town. They are considering expanding the business by increasing the number of bedrooms.

What is meant by:

a) (i) Fixed assets; Leasehold premises;

(ii) Current assets?

b) comment on the Liquidity position of the company.

c) Mr and Mrs Roberts are considering expanding the business by increasing the number of bedrooms. What factors would they have to take into account if they had the opportunity to receive a cash injection from an investor?

d) what factors, other than those shown in the balance sheet, should a potential investor take into account?

(Marks available: 20)

Answer

Answer outline and marking scheme for question: 3

Give yourself marks for mentioning any of the points below:

a) (i) Fixed assets owned by th company which are not part of trading stock and do not vary as output changes.

Leasehold premises are where the user of the premises does not own the property outright. Uses the premises for a fixed term, making a payment to the leasor.

(ii) Current assets are items owned by the organisation. The value of these items changes on a regular basis, e.g. food and drink.

(5 marks)

b) Ratios current:


Liquidity =

The company is solvent, but perhaps too much stock.

(5 marks)

c) Mr Roberts. What form would the investment take, cash injection, loan, share of the business.

If loan, what would the repayment be?

If share of the business, what percentage of the company, how much involvement in the running of the company.

(5 marks)

d) What is the past financial record of the company?

Is there a market for the increase in the service offered?

Seasonal business, will there be a problem with cashflow?

How is the organisation run?

(5 marks)

(Marks available: 20)