Question 1a
Nick Evan has been discussing with directors of Art of the Orient the steps taken by
accountants to ensure that financial statements are useful. He mentioned that in the
view of the accounting profession the usefulness of the information in the financial
statements is determined primarily by two qualitative characteristics known as
relevance and reliability. List and explain FIVE issues to the directors regarding the
meaning of relevance and reliability. (Word limit:300 words) (10 marks)
Question 1b
Describe FIVE specific uses of company financial information by investors and give
examples of information, which may be relevant to each of these uses. (Word
limit:300 words) (10 marks)
Question 2
Transcript Company is preparing a cash budget for February. The company has
$150,000 cash at the beginning of February and anticipates total sales of $800,000,
consisting of 25% cash sales and 75% credit card sales. The bank charges 3 percent
for credit card transactions. The company sets its selling price at 160 percent of the
cost of purchases and pays the cost of each month’s sales at the end of the month.
Other cash disbursements are $20,000 per month and 4 percent of the total sales. In
addition, a $600,000 note will be due in February for equipment purchased last
August. Transcript Company has an agreement with its bank to maintain a cash
balance of $100,000.
Required
A) Calculate the ending cash balance for the budget period. What amount, if
any, must the company borrow during February? (10 marks)
B) Identify and explain TWO ways that a company can change its inventory level in
order to achieve a better cash budget performance. (Word limit:100 words)
(5 marks)
C) Kurt Helfter graduated with a B.S. degree in Mechanical Engineering and
joined Andrew Consulting, a firm specializing in HVAC (heating, ventilation,
and air conditioning) for small to medium-size business structures. Kurt is
knowledgeable in the use of CAD (computer-assisted design) and was pleased
during his initial employment to find Andrew Consulting a leader in the use of
CAD software.
During Kurt’s third year at Andrew, he felt a sense of unease with the firm’s
slow pace in updating computer hardware and software. Although not
directly involved in budgeting for the firm, Kurt has been satisfied with the
resources that Andrew provided for his use. Kurt felt the need to detail his
concerns in a memo to his superior, in which he requested significant
investment in computer resources to “allow us to respond to clients’ needs,
both in quantity and quality.” Kurt was surprised and hurt when he received
his superior’s response, which suggested that resource allocation in the firm
is decided at a higher administrative level. “But all I wanted to do was help
keep our firm competitive,” Kurt responded to his boss when visiting him
about the rejection memo. “Sorry, Kurt,” his boss said, “That’s how things get
done in this firm.” Kurt now feels lost, wondering if it’s time to look for
another job.
Does this situation suggest what type of budgeting process the company is
using? Is there a problem with individual and company goal congruence in
Andrew Consulting? If so, how might Kurt’s supervisor have prevented the
problem? (Word limit:150 words) (5 marks)
Question 3
An accounting standard is a common set of principles, standards, and procedures that
define the basis of financial accounting policies and practices. Accounting standards
improve the transparency of financial reporting in all countries. In Hong Kong, Hong
Kong Accounting Standards are widely accepted for preparing financial statements.
International companies follow the International Financial Reporting Standards,
which are set by the International Accounting Standards Board and serve as the
guideline.
As an accounts department supervisor, your boss asked you to prepare the following
information for his seminar for the trainee orientation next week.
Required
Explain “Current assets and non-current assets” according to Hong Kong Accounting
Standard HKAS 1. (Word limit:100 words) (9 marks)
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