Financial_Accounting

QUESTION 1 INCOME STATEMENT OF PRONTO PRINT AS AT 31ST DECEMBER 2010 £ Sales Revenue 88,254 + 19,591 107,845 Cost of sales £2400 + £44,000 + 1070 (47,470) Less closing inventory (3,100) Gross profit 52,528 Other incomes Sale of old equipment & Bank interest 1,657 Operating profit 54,185 Admin & other expenses Van (7600) General Business Expenses (9250) Rent (4800) Electricity 3200+1120 (4320) Telephone (720) Depreciation (Motor van 3600 + Machinery 950) (4550) Provision for bad debt (120) Loss from fix asset disposal (9000) Net profit 13,825 BALANCE SHEET OF PRONTO PRINT AS AT 31ST DECEMBER 2010 ASSETS £ CLAIMS £ Tangible Assets Equity 30,000 Printing Equipment (Cost) 20,000 Equity withdrawal (24,000) Van (cost) 6,000 Retained profit 13,825 Depreciation 950+3600 (4,550) Intangible Asset 1,900 Current Assets Other Liabilities Inventory 3100 Accruals 1,120 Receivables 4445 Payables 1,070 Prepayment 1200 Cash at Bank 1487 Total £33,582 £22,015 Question 1 ‘Accounting is concerned with collecting, analysing and communicating financial information. The purpose of which is to help people who use this information to make informed decision’ (Attril & Mclaney 2011). Efficient accounting systems are an essential ingredient of an efficient business. Balance sheets, Income statements and statements of cash flow are the three main financial statements that form the core of Financial Accounting. The statements are used to provide information about the financial position, performance and changes in financial position of a firm, so as to help users make informed decisions. Financial statements serve as yardstick for measuring transparent and efficient running of organisation as well as for allocation of scarce resources. These statements also help users know how much wealth was generated or lost in a firm by providing a picture of the financial health of the firm. Other users such as shareholders also use financial statements to assess how well the company is being run and its long term prospects. Question 2. Market value is the price of the stock of a listed company. In other words it is the price which sellers are willing to sell and buyers are willing to buy a common stock. For an unlisted company, it is the price which a willing buyer is prepared to pay for the company. Rapparport (1986) opines that the market value of a firm is the net asset value of all future cash flows expected to accrue to a firm. Thus it is said that market value is book value plus the value of off-balance sheet assets like patent, goodwill and brand premium. On the other hand, book value is the net asset value of a firm or its balance sheet value. It is normally represented as the shareholders equity of the firm. In other words it is the value of all assets, less depreciation and liabilities, divided by the number of stocks of the company. When compared to a company's market value, the book value can indicate whether a stock is underpriced or overpriced. Market value is always different and most times greater than book value. It is like a moving picture whereas the book value is like a still picture taken at a point in time. Thus, whereas the market value changes frequently depending on the price in which shares of the firm are being traded in the stock market, book value is basically the sum of all tangible assets minus liabilities. When the market value of a company is greater than its book value (P/B>1), it is assumed that the company is doing well and being rewarded by the market, however, when the market value is lower than the book value (P/B