Accounting Question Thread

[sam.utute]

This is a question that appears on basically every exam. I just want to get an idea how you guys would word the answer.

State one limitation of ratio analysis.

[eeps]

This is a question that appears on basically every exam. I just want to get an idea how you guys would word the answer.

State one limitation of ratio analysis.

One limitation is that ratios are a static measure - only shows the business financial position at a given point in time.

As it only says "State" you don't need to go into too much detail, as long as the marker can understand what you mean. Generally these questions would be worth 1 mark, thus detail isn't required as such.

[sam.utute]

What about "Ratio analysis is based on historical data"? Is there any way you could expand on that? It seems a little generic.

[eeps]

What about "Ratio analysis is based on historical data"? Is there any way you could expand on that? It seems a little generic.

You could say that it relys/based on historical data - e.g. items like Stock Control, Sales. There is no guarantee what will happen in the future. By using historical data, the ratios would be misleading/useless to the business because Stock Control and Sales change in value at any time, thus it would not reflect the business' financial position in the current time.

[sam.utute]

What about "Ratio analysis is based on historical data"? Is there any way you could expand on that? It seems a little generic.

You could say that it relys/based on historical data - e.g. items like Stock Control, Sales. There is no guarantee what will happen in the future. By using historical data, the ratios would be misleading/useless to the business because Stock Control and Sales change in value at any time, thus it would not reflect the business' financial position in the current time.

Thanks mate!

[eeps]

This was a question from the TSFX booklet:

State two ways to improve estimated operating inflows and two ways to reduce operating outflows.

What would be people's response to this question?..

[mba]

State two ways to improve estimated operating inflows and two ways to reduce operating outflows.

Operating inflows:
Increase debt collection follow up to reduce bad debts expense resulting in higher receipts from debtors and thus higher operating inflows.
Reduce discounts offered to debtors resulting in higher receipts from debtors and thus higher operating inflows.

Operating outflows:
Buy stock in bulk which may decrease the overall cost of stock (through discounts) leading to lower cash payments for stock thus reducing operating outflows.
Attempt to pay within the credit terms offered by creditors so that discounts can be used, reducing the payment amount for stock thus reducing operating outflows.

MBA.

[eeps]

State two ways to improve estimated operating inflows and two ways to reduce operating outflows.

Operating inflows:
Increase debt collection follow up to reduce bad debts expense resulting in higher receipts from debtors and thus higher operating inflows.
Reduce discounts offered to debtors resulting in higher receipts from debtors and thus higher operating inflows.

Operating outflows:
Buy stock in bulk which may decrease the overall cost of stock (through discounts) leading to lower cash payments for stock thus reducing operating outflows.
Attempt to pay within the credit terms offered by creditors so that discounts can be used, reducing the payment amount for stock thus reducing operating outflows.

MBA.

Thanks!

[eeps]

Identify two reasons why a business might dispose of a van for less than its' carrying value. (2 marks)

I'm not sure what the reasons would be. Anyone help?

Thanks.

[sam.utute]

Identify two reasons why a business might dispose of a van for less than its' carrying value. (2 marks)

I'm not sure what the reasons would be. Anyone help?

Thanks.

I think this is again a question regarding under/over-depreciation of non-current assets.

The van was in a worse physical condition than originally anticipated.
The van's carrying value was overstated during original depreciation estimations.

[eeps]

Identify two reasons why a business might dispose of a van for less than its' carrying value. (2 marks)

I'm not sure what the reasons would be. Anyone help?

Thanks.

I think this is again a question regarding under/over-depreciation of non-current assets.

The van was in a worse physical condition than originally anticipated.
The van's carrying value was overstated during original depreciation estimations.

Cheers!

[eeps]

This question came from the TSFX booklet...

Explain how the carrying value of an asset is an expense when the asset is sold (but not reported in the P/L Statement.)

Anyone help (again)?

Cheers.

[Yitzi_K]

Because your revenue on the sale of an asset = The full amount you receive for the asset, less the carrying value. (Example: Asset with a carrying value of $2000, you receive $3000, you made a profit (revenue) on the sale of $1000.) Therefore the carrying value represents a deduction on the revenue, as it is only the extra on top of the carrying value of the amount you received that is actually profit, therefore the carrying value is a sort of negative revenue, hence an expense.

[davyp3]

what i dont get about the question is that how an expense can be incurred by the firm yet no mention of it is made in the Profit and Loss Statement.

[sam.utute]

No mention is made in the P/L Statement because the Loss or Profit on Disposal of Asset has already taken into account the negative revenue/expense. Instead of reporting the expense created by the carrying value and the revenue/expense created as a result of trade-in or sale, an overall loss or profit is reported in the Statement. There was a question about this in the Cambridge Textbook Chapter 15.